Numismatics or Bullion Coins: How to Minimize Your Risk

Coin collecting is a hobby millions of people enjoy every day. There’s the innocent kind, like collecting pennies. When gold and silver coins are “collected,” the price of investing goes way up, as do the risks. Very old precious coins with high historic and collectible appeal are called numismatics. These are coins where the historic value far exceeds the bullion value of the underlying precious metal. Semi-numismatic coins are a hybrid of underlying value that is semi historic and semi bullion.

Numismatic and semi-numismatic coins’ values are tied to the underlying history and, frankly, continuing interest in the history surrounding the coin. So much of the cost of these coins is “blue sky” which can be hyped and inflated because, for the casual buyer, a standard against which to measure the true value of these coins are elusive. The problem is that many investors do not know how to gauge the real value of these coins and find themselves losing money when they sell their coins later.

There are two questions we need to ask here:

1) How is it possible for any investor to lose money on a valuable, rare coin?

2) Why doesn’t the value of the coin increase with the rise of precious metals prices?

The answer to these questions highlights three specific risks both new and experienced investors must deal with when deciding to get involved with numismatics. Below we will look at these risks and discover how to avoid losing money by identifying tactics dealers may use to try to take advantage of you.

The Benefits of Investing in Bullion Coins Instead of Collectible Coins

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Avoid Overpaying

There are two basic types of coins to invest in. The first is what is called a bullion coin, which is made of a precious metal. The most popular are gold and silver bullion coins like American Silver Eagles. Bullion coins are 100 percent metal, so their value is tied to the price of that metal. Numismatic coins can be 100 percent metal, but their real value lies in how rare they are. You are likely to pay a premium far above and beyond the cost of the metal, anywhere from 25% to as much as 10,000%. The reason is simple: the coin is rare.

But the premium is not the problem. The value of any numismatic coin is based on three factors:

  • Demand
  • Rarity
  • Condition

These factors make the actual value of the coin subjective, even when objective standards are used. Values seen online or in print publications can only be used as a general guide. And this is the first reason investors lose money when they sell their coins: overpayment. Aggressive dealers hype the coins because they have large margins. Well, it’s kind of like when you drive a new car off the lot… the car immediately decreases in value because dealer profits decrease the real resale value.

A numismatic coin can have two of the three key factors (it is rare and in good condition) that determine its value but if the demand isn’t there the selling price will not rise. If you overpaid for a coin where the current demand is low, you are very likely to lose money even if the price of the coin’s metal increases. Bullion coins such as the American Silver Eagle simply retain their value based on the market price of the metal.

Don’t Fall Victim to the Bait and Switch

This tactic is used every day, and not just in the area of numismatics. A precious metals dealer advertises an offer on a bullion coin that seems too good to pass up. You call or visit the dealer to discuss the opportunity, and you get “switched” to an offer for a numismatic coin they claim has greater investment potential and the chance for a bigger return on investment. The dealer will get a much higher commission on selling you the numismatic coin. If you see a dealer who is on television making you such an offer, chances are you will be the next bait and switch target.

Our research has uncovered dozens of collectors who have overpaid insane amounts of money for their gold and silver coins. One company, Merit Gold and Silver, made the news in a very bad way by being charged with a fraud scheme that conned tens of millions of dollars from people across the country. The prosecutor in charge of the case said about 97% of the gross profits were the result of selling numismatic coins. Markups were so high that buyers had virtually no chance to break even on selling the coins. There was no record of even a single buyer selling one of Merit’s coins for a profit.

Lack of Education and Misinformation

Not doing your homework is perhaps the most common reason people overpay for numismatic coins. It is true you can hold a piece of history in your hand, but the history itself does not mean you have a quality investment. Just like any collectible – baseball cards, comic books – you need to know the market well to decide whether you are making a good investment.

The U.S. Federal Trade Commission (FTC) released a consumer report, “Investing in Collectible Coins,” that has a list of recommendations for numismatic investors. Among the recommendations are:

  • If you are thinking about buying collectible coins we have three words for you: research, research, research.
  • The research does not stop with the knowledge of the coin but extends to the dealer who is selling it.

The difference between the educated and uneducated investor is the difference between fun and regret. The fun is in making money; the regret is in losing it. The common saying in numismatic circles, “Buy the book before the coin” is common for a reason. Make the time to do your research on every coin before you decide to make a purchase.

Even the U.S. government understands that rare coins are too risky an investment. U.S. law prohibits collectibles as part of an Individual Retirement Account (IRA). Bullion coins yes; collectibles, no. The risk factor associated with numismatic coins is very high and not deemed safe for retirement purposes.

With all the talk about making money on numismatic coins, it is easy to think that most collectors are doing it for profit. The truth is, the reality is exactly the opposite. Serious collectors often look for a particular coin to add to or complete their collection, and this is one of the few cases where a profit can be made. The sound advice is: if your attitude leans more towards profit than on the collection, find another avenue to invest your money.

Avoiding Gold Confiscation

This is a tactic that has been around for years. The problem with this particular tactic is that there is actually a convincing history behind it in the form of a federal law that can be used to mislead people.

In 1933, President Roosevelt issued Executive Order 6102, which prohibited private ownership of gold in America. U.S. citizens were required to hand over their gold bullion to a Federal Reserve Bank or be subject to a $10,000 fine and/or 10 years in jail. There were two exemptions stated in the order:

1) Gold coin and gold certificates in an amount not exceeding in the aggregate $100 belonging to any one person

2) Gold coins having a recognized special value to collectors of rare and unusual coins

So based on #2, it makes perfect sense to buy some numismatic coins and avoid a future confiscation order.

But this is the 21st century and the United States is not on a gold standard for its currency as it was back in 1933. This reality makes gold confiscation highly unlikely. Another reality is that true numismatic collectors will have a collection, not just a few coins. Like the IRS, the federal government is likely to put the burden on you that you are actually an investor, not just someone who is trying to hide the gold from the confiscation. Having several unrelated rare coins will not be much proof of being a collector.

Here we can bring together risks #1 and #2, and show whether you are truly a collector or not. All we need to do is ask one question: Are you being cheated on the bid/offer price of any numismatic coin in your collection? A blank look or wrong answer will tell the tale.

Selling Can Be Tricky

The real issue is how much you will get for your rare coin, not whether you can sell it or not. The issue of overpaying was the first risk, and on the other side of the coin is being underpaid when you sell the coin. A few basics are in order here.

With numismatics, you naturally overpay because of the broker’s commission. So, the premium on your coin must increase significantly if you are going to turn any profit at all. The lowest your coin should ever sell for is the value of the base metal. That’s a very broad range that largely moves up or down based on the law of supply and demand. If there’s a large supply of your coin, price goes down. Also, if there’s very low demand for your coin, price goes down. In the numismatic world of supply and demand, a buyer has to be found. The harder that is, the more your selling price is discounted. Perhaps the most important fact to know in numismatics is that the rare coin market is very small. Small markets mean very few buyers.

Don’t Let Dealers Make you Believe that Rare Coins Will Earn More

Like the Gold Confiscation tactic, there is a certain amount of history to this claim. You will be shown charts that compare the rise in rare coin value to bullion coins, with the rare coin values being dramatically higher. Numbers don’t lie, but the problem is that this does not apply to all rare coins, nor does it apply all the time.

One important fact the charts will not show is the difference between what a buyer actually paid for a coin and what they sold it for. For the seller, that is the bottom line. Then there is the dealer commission that is not included or the bid/ask spreads that can be wildly different.

The simplest way to reply to this tactic is to ask what the bid price is of the coin that you are interested in buying. Imply that you have the coin to sell and are looking to get the best price for it. You will get a number that is much closer to the actual value of the coin.

Then there is the advertised buy back policy some dealers have used to show that the risk of loss is minimal. But unless the guarantee is unconditional, and it will not be, then you could find the dealer withdrawing their offer, citing market conditions that make fulfilling their promise impossible, or simply offering to buy back the coin at a substantially lower price.

We recommend sticking with only bullion, like the American Silver Eagle, to avoid all these headaches for any investor, and only go down the numismatic path if you intend to be a serious, long term coin collector.

Speak with one of our metals strategists to learn more about the different types of bullion on the market and which might be best suited to help you achieve your investment goals. Contact us at (800) 867-6768 today.