[ Updated: May 23, 2017 ]
Numismatic coins can be a fun hobby, and can offer the collector a beautiful
timepiece from interesting periods in history.
Unfortunately, many novice investors that dabble in this market have lost
money. And in many of those cases, the price of gold actually rose while the
coins were held!
How can an investor lose money on valuable rare coins? And why don’t they
rise with the gold price?
This article highlights three specific risks investors take with numismatics.
Let’s cover them one by one, including some common dealer tricks…
Risk #1: You Will Overpay
The markup on numismatic coins is much higher than what you’ll pay for a
standard bullion coin. Premiums can range from 25% to thousands of percent.
Premiums are higher for rare coins because they’re, well, rare. But that’s
not the problem. The reasons most people overpay is because the value of a
rare coin is largely subjective. The premium for a numismatic coin is based
on rarity, condition, and demand. Yes, there are annual publications that
list prices, but those prices are often not what they actually sell for.
This is why many investors have lost money in this area. The coins you buy
could be relatively rare and in decent condition—but if they aren’t in great
demand their price won’t rise. This explains why some investors lose money on
numismatics even when the gold price rises. And if you overpaid, it will take
a substantial surge in demand before you can expect to make any kind of
profit.
A bullion coin, on the other hand, like a gold
Eagle, is based on the spot price of gold, not its rarity or demand.
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Dealer Ploy: Bait and Switch. One
reason investors get fleeced is because they fall for this common sales
tactic. Here’s how it works… a gold dealer advertises an incredible deal on
a bullion product… it attracts your attention… you call and they downplay
the advertised bullion product and tout the “investment potential” and
“bigger returns” of numismatics (like pre-1933 gold coins). These are
higher-priced items and hand them a MUCH bigger commission.
Probably the worst culprits are the dealers you see on television. As
someone who’s worked in the industry since 2001 and invested in gold most
of my life, I can tell you thatTV dealers have among the highest markups—they
have to cover large advertising budgets and celebrity endorsements. Avoid
these dealers!
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I’ve read literally dozens of articles over the years about investors that
grossly overpaid for numismatics. For example, Merit
Gold and Silver was charged with a “nationwide fraud scheme that has bilked
consumers out of tens of millions of dollars.” Check out what the
prosecutor said:
“About 97% of the company's gross profits over four years came from coin
sales, not bullion. So steep was the company's markup that even those who
bought gold while prices were on the rise would be unable to recoup their
purchase price. I never saw one client profit from their purchase.”
Unfortunately, there are many other instances of fraud in the numismatic
industry.
There’s one giant reason you could easily overpay for a rare coin…
Risk #2: You Don’t Know Enough
Buying a collectible gold coin allows you to hold history in your hands.
That can hold some appeal.
But that doesn’t necessarily mean you’ve made a good investment.
Just like collecting baseball cards, comic books, or artwork, if you’re
not knowledgeable about the market, it’s hard to know if you’re making a good
investment.
The U.S. Federal Trade Commission issued a consumer report titled Investing
in Collectible Coins, and check out what they recommend every investor
do first:
“If you're thinking about buying collectible coins as an investment, the
Federal Trade Commission (FTC), the nation's consumer protection agency, has
three words for you: research, research, research. In fact, the agency says,
there isn't a potential investor around who can afford not to spend time
researching the coins, the graders who assess them, and the dealers who sell
them.”
If you’re willing to get educated about numismatics, it can be a fun
hobby. If you’re unwilling to learn about the market, the experience of
numerous other investors says you are highly vulnerable to losing money.
In fact, there’s a saying in the numismatic industry: “Buy the book before
the coin.” Meaning, do your research on any given coin before making a
purchase. If you don’t do this, don’t expect to realize a profit.
Here’s another hint that rare gold coins are a risky investment:
• Current U.S. law prohibits ownership of collectibles in an IRA.
If numismatic coins were considered a reasonably safe investment, they’d
be permitted in retirement accounts. Numerous
bullion coins, on the other hand, are acceptable for retirement accounts.
Keep in mind that the industry is primarily driven by collectors, not
investors. This isn’t to say that investors don’t participate or that profits
can’t be made, but the typical buyer is someone who wants a particular coin
for his or her collection. If that doesn’t describe you, I recommend passing
on rare coins.
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Dealer Ploy: Gold Confiscation! Another
tactic of numismatic dealers is the confiscation scare. Here’s how it goes…
President Roosevelt’s 1933 Executive Order 6102 prohibited the private
ownership of gold in America, requiring US citizens to hand over their gold
bullion to a Federal Reserve bank or face a $10,000 fine and/or 10 years
imprisonment. The order listed two exemptions: “Gold coin and gold
certificates in an amount not exceeding in the aggregate $100 belonging to
any one person [about 5 ounces of gold at the time]; and gold coins having
a recognized special value to collectors of rare and unusual coins.” So,
the logic goes, buy some rare coins and you can avoid a future confiscation
order!
However, this is misleading. First, a gold confiscation is unlikely today,
since we’re not on a gold standard now like we were then. Second, even if
there was a confiscation order, government officials may or may not provide
the same exemptions. Further, in past confiscations the onus was on the
investor to prove they were a coin collector and not a bullion buyer—if you
didn’t own a substantial amount of rare coins, you were automatically
deemed a bullion owner, not a collector.
There
are better ways to avoid confiscation if you’re really worried about it.
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To determine if you know enough, take this simple test: Would you know if
you’re being fleeced on the bid/offer price of a collectable coin? If not, I
suggest you pass.
There’s one more risk…
Risk #3: Selling Can Be Tricky
It isn’t that you can’t sell a rare coin. The issue is how much you’ll get
for it.
Just like you can get overcharged on the purchase, you can also get
underpaid on the sale.
Because most investors overpay, the premium on a particular coin has to
appreciate a great deal for you to earn a profit, let alone a big profit. If
demand for your coins hasn’t appreciated, a collector won’t pay the price
you’d hoped for.
You also have to find a willing buyer. Keep in mind that the rare coin
market is tiny. This means you’ll have a very small pool of potential
customers. With a bullion coin, like an American
Gold Buffalo, you have literally millions of potential customers, no
matter where you live or travel.
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Dealer Ploy: Rare Coins Earn More! Some
numismatic dealers will show you a chart of how much more rare coins rise
in value than standard bullion coins. In certain circumstances they do.
However, these statistics almost never reflect what investors pay when they
buy and what they earn when they sell. Those charts exclude dealer
commission and the extreme bid/ask spreads that always accompany these
coins.
The way to combat this is to ask the dealer for the BID price of the
product you are interested in. Hint that you actually own the product and
are in the market to sell, and ask what you can get for it. This will give
you a more transparent idea of what you’d really pay for that coin.
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A few numismatic dealers will claim to have a guarantee buyback policy.
However, keep in mind that even if that policy is in writing, they could
change their minds… or be forced to drop it due to market conditions… or keep
the “guarantee” but offer you a buyback price that is far below what you paid
or what other investors are getting.
• Most investors should avoid the risks with numismatic coins and
buy only bullion coins and bars. And the best way to do
that is to shop at a dealer that only sells bullion.
