those of you who can, think back to the early1970s. The Beatles were
slowly disappearing from the airwaves. Our mothers were throwing out
our Mickey Mantle baseball cards. Our dream cars were the Batmobile or
James Bond's Aston Martin-and the rarest of Ferraris was near
impossible to sell at just $25,000. We'd entertain ourselves by
watching the next door neighbor cut the grass, asking our uncle to tell
us stories about Vietnam or reading books and riding bicycles.
Many children looked for pennies for their Lincoln Cent Collection. A successful paper route often determined how many of the 89 coins you could find from the first book. The most common 75 came from spare change or the contents of grandpa's pockets. The next 12 would come from your neighborhood coin store, costing somewhere between $1 and $10 each. Wealthy kids bought coin #88, a coin minted in 1922 costing upwards of $20. But almost no one could swallow the price of the 1909-S VDB, the rare coin that is still missing from most collections. Minted in San Francisco by Victor D. Brenner, it had the designer's initials on the reverse and cost $35. You and your friends agreed that $35 for a penny just seemed dumb, turning your thoughts to all the candy that money would buy.
Thirty-five years later, a lot has changed. Retro is everywhere, but this time around it carries a premium. The Beatles are still a best-selling group, but the songs are downloaded for about $1 a piece, the royalties go to Michael Jackson, and Paul McCartney is embroiled in a nasty, public divorce with his second wife. That Plymouth Barracuda that buzzed us at 110 MPH on the highways is now painstakingly restored, travels on a climate-controlled trailer and regularly sells for more than $80,000 at auctions to muscle car collectors. The five original Batmobiles have all changed hands in the past decade, some Ferraris are priced above $1 million and baseball cards frequently crack that barrier. The Xbox 360 helps kids visualize what war is about, if they're not watching TV, surfing the Internet or listening to their iPods.
For 25 years, kids have ignored coins. There was no reason for any child to start collecting because you could ask for $100 in pennies at your local bank branch and not find a single coin worth two cents in the whole lot.
In that time there were a few bull markets for coin investing, but they were only for investors and not collectors. Before the Hunt brothers went to jail over the collapse of the silver market, precious metals were a tan all-time high, giving rare coins a much-needed shot in the arm in 1980. Wall Street invested in 1986 and again in 1989, but the collectable coin market was mostly a forgotten place.
Things began to change in 1999. The State Quarter Program-a ten-year project in which coins depicting the historical significance of each of the 50 United States are released one at a time every ten weeks-was introduced. For the first time in 30 years, people had a reason to check their change. The program helped attract new, younger collectors into the fold and the new designs reignited the interest of past collectors who allowed their collections to lie dormant for a quarter of a century. The hunt to find all 50 coins in circulation was a fun challenge, and the U.S. Mint estimates that more than 50 million people are now collecting the state quarters.
That elusive penny, the 1909-S VDB, unobtainable in 1972 for $35, had increased in value more than ten times by the year 2000. Almost 30 years had passed, but finally many collectors were finishing their penny set. The simple laws of economy were catching up to coins.
"A benefit of numismatic investing is anonymity, something most ultra-affluent individuals crave."
Thousands of new collectors entered the marketplace around the turn of the century and drove the price of rare coins up even further. Three years later that 1909-S VDB was valued at more than $1,000 and other low mintage coins like Mercury Dimes, Buffalo Nickels and Morgan Dollars increased in value as they were heavily sought by the spate of active, competitive collectors.
There is always a market for the "best" of anything, and the surge in private wealth has helped drive prices into staggering territory. With enough money, a person can get just about anything they want-and they do. A gold Patek Phillipe pocket watch was sold for $11 million at a 1999 auction, a Jackson Pollock painting exchanged hands for just over $142 million in a private sale last year and, just last month, 40 acres of beachfront property in the Hamptons was sold for $103 million. Coins also have benefited from the highly acquisitive environment; a 1913 Liberty nickel, with a mintage of just five coins, escalated in price from $1.8 million to $4.2 million in just a few years, and an 1804 silver dollar went from $1.2 million to $6.8 million in a similar time frame.
The Value Of A Coin
A number of factors drive the numismatic market in the aggregate.
The policies the government has concerning coinage can be a major factor.
The renaissance of coin collecting combined with new coins, such as the presidential dollars, and initiatives like the State Quarter Program can help increase the interest in numismatics. That interest translates into greater levels of overall interest in rare coins and, thus, higher prices.
Inflation also tends to drive up the price of rare coins. There is a strong correlation between the price of precious metals and rare coins, and both are seen as a hedge against inflation.
Along the same lines, numismatics is generally viewed as its own asset class. It performs independently of other markets and, therefore, can be attractive regardless of how other investments are performing. For instance, coins can be used as a diversifying or stabilizing element in a portfolio, or as a hedge against the anticipated performance of a particular market or asset class.
When it comes to specific coins, a combination of additional factors comes into play-the original mintage, the condition, the overall appearance of the coin, the popularity of the design and how the coin rates relative to others of the same year that are available.
Beginning in 1986, as the rare coin business matured, most coins eventually were certified. Similar to diamonds, coins are sent to one of the major third-party grading services where they are determined to be authentic, evaluated by the country's leading experts and assigned a grade from one to 70. The coin is then encapsulated in plastic and accompanied with documentation to allay questions regarding authenticity and grade. By purchasing certified rare coins, affluent investors can protect themselves against fraud and be certain they are, in fact, getting what they pay for. Two of the more widely used grading services are:
The Professional Coin Grading Service (www.pcgs.com). It was established in 1986 to independently grade and certify as genuine rare coins.
The Numismatic Guaranty Corp. (www.ncgcoin.com). NGC served as the official grading service of the largest coin organization in the U.S., the American Numismatic Association.
The Principal Reasons To Invest
Rare coins are an attractive investment for a number of reasons. Historically, coins have appreciated in value; investors practicing a judicious approach, making informed purchases and thoughtfully developing their collection, have had solid results. Rare coins also are useful as a hedge against inflation and other investments. So, for the wealthy they can be useful as an asset class in a well-diversified investment portfolio.
Owning a piece of history has great appeal for many wealthy investors and, unlike some assets, American coins are tangible investments in one of the world's great capital markets. Possessing a coin designed by a renowned artist or one that has been brought to life by Teddy Roosevelt, for example, is just an added bonus.
In a similar vein other collectors find great satisfaction, whether personal or competitive, in completing a series of coins, and the value of a complete set is a great deal higher than the sum total of its individual coins. Coin collections can be built around many variables, and the grading agencies sponsor competitions to find the finest complete sets in gold, silver, copper and nickel.
Another reason the affluent invest in rare coins is liquidity. Numismatics is the most liquid of all collectibles. The grading agencies have provided structure and clarity to the field, and the pricing information that is readily accessible online makes it much easier to valuate a coin at any given time. Coin dealers, trade shows, auctions and online trading create a environment where sales can be arranged quickly, especially since buyers for truly rare coins currently outnumber sellers.
One final benefit of numismatic investing is anonymity, something most ultra-affluent individuals crave. The records and documentation on coin collections are maintained by the owner; therefore it is possible to buy and sell rare coins without a conventional paper trail.
While rare coins can be an excellent investment and an effective way to diversify a portfolio, there is a downside to numismatics. Many of these problems are associated with mass marketing. Any infomercial or nationwide advertising campaign cannot possibly be offering rare coins; products available in massive quantities must be sold in volume. This doesn't mean it can't become a component of a valuable set at some point in the future, but should be fully understood before any purchase is made.
Most serious investors work with coin dealers or other numismatic professionals. These experts can provide a great deal of insight and access that can help investors make critical acquisitions. It is important, however, to evaluate the credentials of any professional before engaging them. Some dealers simply run businesses rather than truly specializing in the field, and their knowledge of rare coins and value scan be limited. A seasoned professional knows how to work with affluent investors to shape a numismatic portfolio and find the best coins based on their objectives.
To mitigate the risks of purchasing overpriced coins, affluent investors should restrict their purchases to certified rare coins. The certification process, while not perfect, has been effective in decreasing unsavory sales practices. It's important to remember that just because a coin is certified doesn't mean it's rare. A good rule of thumb is to avoid coins minted within the last 50 years, as the mintages tend to be large and the coins of universally high grade.
Lastly, interested investors or collectors should learn what makes coins increase in value. Being informed will make it easier to make intelligent and calculated decisions, or act quickly when a unique opportunity presents itself. Like the enthusiasts of vintage automobiles or fine art, today's coin collectors may find themselves finally fulfilling a childhood dream-or at least finishing their penny set with that elusive 1909-S VDB. Heads you win, tails you win.
Locking In Profits
Numismatic investing is an activity many ultra-affluent individuals are becoming more involved in. As noted by our contributing editor, Ira Einhorn, many wealthy investors are diversifying their portfolios and turning to collectibles, such as rare coins, as a way to hedge against a downturn in the securities markets. While rare coins have done quite well in recent years, like any investment they can depreciate in value. Consequently, some affluent investors with sizeable rare coin holdings are looking for strategies to help them lock in profits. These investors are hedging their numismatic investments in a number of ways.
Private Insurance Agreements
One of the more straightforward ways to lock in numismatic profits is to "insure" the coin portfolio. This isn't traditional insurance, but protection against a decrease in the aggregate value of the coins. The most cost effective way to do this is through a private arrangement between the numismatic investor and a well-capitalized organization with investment capabilities, such as a family office or a hedge fund. In this type of scenario, the investor contracts with a hedge fund to make up the difference between the value of the numismatic portfolio when the insurance was purchased and its value at a future date. The investor pays a premium for the coverage, which is how the hedge fund will profit (assuming it does not have to pay out any claims). The protection is an escrow account established by the hedge fund holding assets for possible claim payments. Valuation of the numismatic portfolio is conducted by a third-party expert selected jointly by the investor and the hedge fund.
Along the same lines, some affluent coin investors are selling "covered calls" on their numismatic portfolios. This allows them to enhance their profits and establish a floor for the portfolio's value. To date, the principal buyers of these "covered calls" have been hedge funds and they usually are "side pocket" investments, a separate account created for real assets and other difficult to value securities. As with the insurance scenario, an objective third-party is essential for the valuation process. One major difference between the strategies on approaches, however, is that the buyer of the "covered call" takes ownership of the coin portfolio.
Amore complex option is the conversion of a collectible portfolio into a structured product that is sold to sophisticated investors, like institutions, hedge funds, family offices or ultra-high-net-worth, independent investors looking for unique opportunities. In these scenarios, the risks associated with the portfolio are segregated and sold separately. Often, these investments are highly leveraged, so a small move in the portfolio's value can result in a large profit or loss to the purchaser of the structured product. Very few transactions of this type have occurred to date, but we anticipate more as affluent investors seek innovative ways to secure their investments. Understandably, major coin investors want to protect themselves against the devastating effects of depreciation, and a number of methods will allow investors to lock in the value of their portfolio. On the flip side, some very wealthy and savvy investors are willing to be part of the solution and, in doing so, create an opportunity for themselves to profit.