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NAVIGATING THE PITFALLS OF THE UNREGULATED COIN INDUSTRY

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NAVIGATING THE PITFALLS OF THE UNREGULATED COIN INDUSTRY

Rare and unusual coins have been collected for hundreds of years. There is just something very intriguing to many people about holding a coin in their hands and wondering where that coin has been or who may have held it in their hands. An old coin conjures up thoughts of history and times gone by.

I recently bought a silver coin that was made between 336-323 BC that is nearly the same shape as the day it was made. Just holding this coin makes the mind wonder about what was happening at that point in history and how this coin survived for 2300 years in nearly perfect condition.

You would think a coin such as this would be worth huge amounts of money, but surprisingly it is worth less than $1000 (around £780).

Age alone does not make a coin valuable

Historic value, condition, number of coins surviving and demand from collectors determine the value of a rare coin.

A good example is the rare 1794 US Silver Dollar which will be going to auction sometime this year. It is one of only 1,758 coins minted with a likely 130 coins surviving. Most people were not too worried about saving their coins posterity at the time in American History.

Add to the fact that it is widely believed to be the first coin struck at the US Mint as well as the finest known survivor, there is a great deal of interest in the coin. 

The coin was likely viewed or held by George Washington, Thomas Jefferson, and Alexander Hamilton because of its significance at the time.

A coin such as this certainly ticks off all the boxes of a desirable, historically significant coin in top quality. The coin sold for $10 million in 2013! It will be offered at auction again this year at auction.

HOW TO MAKE MONEY IN COLLECTIBLE COINS

It may seem a simple proposition to make money in the numismatic or collectible coin market.

The idea is certainly simple. You figure out which coins are desirable and in demand by collectors of rare coins and buy those coins. As the market moves forward you hope demand stays strong and when prices increase based on demand from collectors you sell your coin back into the market for a profit. Easy, right?

Unfortunately, it is not as easy as that. Many coins that were considered rare and desirable 30 years ago are considered common today.  There are several reasons for that.

Over the past three decades there has been drop in the number of collectors in the marketplace. Fewer collectors mean fewer buyers for many old favorites. Many coins that were in high demand now go looking for buyers and thus prices have fallen in many areas of the market.

Trends change. In the 1950’s and 1960’s the US market was more concentrated on Bank Rolls of coins. Collecting was at an all time high and with plenty of buyers there was a great market for coins that by today's standards are very common. After all, how rare is a coin that you can purchase hundreds of?

In 1986- and 1987-coin certification became popular in the United States and today there is hardly a rare coin that trades hands that has not been certified by PCGS or NGC - the two big coin grading companies in the US.

The upside of the grading companies was that collectors were now able to buy properly graded coins and the quality was not so subjective. The divergence of one grade on coin can mean the difference of thousands, even tens of thousands of dollars on very rare coins.

 Initially standardizing the grading was a boon to the rare coin market. No longer did buyers have to worry that they might buy a coin thinking it was one grade and end up selling at a lower grade, which could have a major effect on value. In the following years the rare coin market went up in value 300% and more.

An unintended consequence stopped the market in its tracks by 1990.

The grading companies kept track of how many coins of each type and quality were certified. We found out that in many cases there were a lot more coins that had survived than anyone thought.  Number of coins available has caused prices to come down and many coins now sell for 25% or less than what they worth 30 years ago.

Fun fact : PCGS (Professional Coin Grading Service) has just recently graded its 75th million coin!

The rival certification company NGC (Numismatic Grading Corp) is not far behind in number of coins graded.

The Key is finding that small percentage of coins that are still sought after by the smaller base of collectors and whose rarity has stayed constant.

BUY THE “OLD MASTERS” OF THE COIN WORLD

Coin collecting in the US peeked in the 1960’s and has steadily declined since. The main reason so many not so rare coins had their day in the sun was simply the number of people buying coins for collections as well speculation.

So even common coins were promoted by dealers and scooped up by individuals. Today there are far fewer buyers; but those buyers are much more serious.

If an investor approaches the Rare Coin market the way serious art buyers approach that market, they would be much more successful.

We all are amazed by rare paintings going or prices in the hundreds of million dollars. It’s usually a well-known classic painting.

The same is true of rare coins. The classic rarities are perhaps the best bets. It is true that money can be made by buying into trends. These trends are usually shorter lived and unreliable. It is more gambling than investing.

Truly rare coins can run in the hundreds of thousand dollars to the millions.

A rare 1936 King Edward VIII 1 Pound coin sold for over 1 million pounds. The coin is one of only six minted and commemorates the ascension to the throne of the King who later abdicated to marry an American.

This is a classic example of a coins that captures it all. It is extremely rare with only six minted, and it has an international story that makes it treasured by collectors in both the UK and the US.

 

The Truth About Rare Coins

I have seen countless charts and historical price comparisons about rare coins which quite frankly make them look like the best investment a person could ever make. There are many rare coins that have been phenomenal investments. The key is to work with a dealer to figure out which rare coins have a chance of providing substantial appreciation. There are many options, but they generally are not the coins that are highly promoted by dealers. You must own the “right” coins or you may be in for a huge disappointment. Buying from a “broker” at some of the large telemarketing firms is usually a mistake.

Many charts or historical pricing models are deeply flawed. The chart writers stack the chart by adding coins that have done better rather than representing a true view of the actual market.

When pricing coins for comparisons they are assuming the defined grading standards are the same today as they were in 1970, which they are not. Let me explain...

Grading in the US has changed substantially since the 1970’s, yet many chart coins from 1970 to present to prove their appreciation. In 1970 there were two grades of uncirculated coins MS-60 and MS-65. Later the MS-63 grade was adopted. The definition of an MS-65 was simply a “better than average” quality of coin. That means half the coins qualified as MS-65 in 1970.

Today, we have 11 grades of uncirculated coins including MS-60, 61, 62 and so on to MS-70. On top of that, coins can be graded with a “+” or “*” to indicate they are in between two grades.

So, the first question is “How do you compare the price of an MS-64 coin today to the same grade back in 1970?”, especially when that grade did not exist. Secondly, an MS-65 today is not simply better than average as defined in 1970 – it is a top-quality coin and accounts for a small percentage of overall coins. The standards today are much stricter than the 1970’s or early 1980’s. It is likely that the coin graded MS-65 in 1970 could be a MS-62, 63, or 64 by today’s standards. That changes the value of the coin substantially.

Here is just one example of how a change in grade can affect the appreciation of a coin from the 1970’s. Suppose a $5 Indian, graded MS-65 in 1970 sold for $300 at that time. Today’s MS-65 coin is a $6,000 + coin. That is a 1900% increase in price. However, chances are great that a coin graded MS-65 in 1970 is more likely to be an MS-63 by today’s standards and worth $650. While still more than doubling its price, it is a far cry from the profits professed by the flawed charts.

There are more coins that have sold for $1 million or more over the past couple of years than ever before. This shows that the market for ultra-rare coins is strong, but it does not translate into a strong market for all rare coins. I understand that most coin buyers can’t afford a $1 million for a rare coin. The point is if you want to invest in rare coins it is essential that you own true rarities professionally graded by PCGS or NGC. Owning coins that are substandard quality or substandard rarity is simply not likely to produce results.

Today, more than ever before it is important to know what your coins are worth and how they performed these past 20 -30 years. If your coins are not certified by PCGS or NGC it could be critical to have them graded depending on the coin’s value.

Rare coins can provide a lifetime of enjoyment and profits for those willing to take the time to learn the market.

The key is dealing with a professional Numismatic coin dealer. Make sure they appropriate credentials. In the US that would include membership in PNG (Professional Numismatists Guild) This is the premiere numismatic dealer’s association.  There are of course many others. 

Buy only the rarest and most historically significant coins regardless of which country’s coins you decide to collect. Whether ancient coins, classic coins or modern coins be sure to do your research and do not buy into the fad of the moment. 

Learn more at americanfederal.com or give us a call at (800) 221 7694.

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  • Nick Grovich
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