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Why Numismatic Investments Are Always Horrible Mistakes, Part 1
(April 5, 2001) People seeking the safety of gold are often waylaid by promoters who tout investing in rare coins as a 'prudent' alternative to gold bullion. This week we explore why numismatic coins are a favorite of commissioned salespeople, and some of the awful truths that they won’t tell you about the rare coin market. - Promoting a $20,000 coin as 'disaster insurance.'
Be forewarned: this article involves me climbing on my soapbox and warning those who are being propositioned by rare coin touts. The world is full of them, for one simple reason: the markups on numismatic coins are substantial. Lots of money is made from selling rare coins to non-collectors. The line of patter you hear from coin salespeople is carefully scripted, intentionally misleading, and, too often, devastatingly effective.

In the interest of full disclosure, let me mention here that I’ve been a coin collector and dealer for decades. Rare coins are a fascinating field to many of us. Collectors often derive a great deal of enjoyment from the study and acquisition of old coins. Coins represent history, art, national identity, and are a timeless expression of the culture that produced them. Not only is the study of numismatics enjoyable, but the bonus is that numismatists actually have something of real value when their collections are completed.

But somehow the popular view of coin collecting has come to be that rare coins are a private, money-making endeavor for shrewd rich people. This perception has opened the door to the popular marketing of rare coins as an investment. The potential buyer is generally pitched the idea that he’s being let in on the insider secrets and special deals of the coin market, opportunities normally available only to the select few.

This 'numismatic investment' scam has been going strong for over 30 years now, and hundred of millions of dollars have been extracted from tens of thousands of non-collector buyers, who usually find out much later how badly the odds were stacked against them when they made their purchase.

It always starts with a phone call.

The call came out of the blue from a financial advisor with a national firm we have worked with over the years. One of his clients had recently sold a business for several million dollars, and that client was interested in converting some small percentage of the proceeds into a gold position.

That client's main concern was to have an alternative form of insurance, to weather whatever the worst economic storm might bring - devaluation of the dollar, a depression, or the failure of our currency to maintain its viability as an exchangeable unit of value. The word 'barter' was even mentioned. In short, he was looking for gold, the oldest and most universally respected element of true value. The financial advisor asked me to bring him up to date on our gold recommendations.

After some conversation about the most prudent and risk-adverse portfolio of gold for his client, the advisor casually mentioned that he had been approached by one of the more prominent, nationally known dealers in rare coins, a published numismatic author and nationally recognized 'expert' in the rare coin field.

This dealer suggested that a particular rare coin he was offering at $20,000 was just the thing to own in case of an economic emergency. Which, coincidentally, was exactly what the client was concerned about.

Of course, the idea that a scarce collector’s item is going to be worth more than its melt-down value when there's blood in the streets is simply ridiculous. It's hard to imagine that in the unlikely event of total economic chaos, connoisseurs of high-quality rarities are going to look for choice specimens to add to their private collections

No, owning a rare coin, or a sketch by Picasso, or a Mickey Mantle rookie card, won’t help you much when everyone's scrambling for survival. So why did this rare coin dealer suggest that collectibles are a prudent disaster hedge?

For the simplest of reasons: the money.

The old saying is that ‘rare coins are sold, not bought.’ And it’s true. More rare coins are aggressively sold to “investors” by salespeople and tele-marketers, than are actually bought by members of the nearly extinct species known as ‘numismatists.’

Collectibles such as rare coins simply are not sold under the laws that protect investors.

Take pricing, for instance. When a stockbroker calls you with a recommendation, you can at least look in the newspaper or online to find the market price of the equity that he's trying to sell you. And it's relatively easy to find out the commission he might make on the sale.

But with coins, antiques, art, jewelry, stamps and collectibles of any stripe, the mark-ups, commissions, and differences between wholesale (the dealer's cost) and retail (what you will pay) are entirely hidden from view. You seldom have any idea what sort of profit is coming right off the top when you purchase an item based on an expert’s appraisal of its value.

Worse still, even assuming you can even determine the dealer's cost on a particular coin, you still don't know what it's worth in a pinch. You may be dealing with someone who bought the item off a standard pricelist and marked it up. Or it may be a multiple-broker deal, with the dealer having gotten it on consignment, perhaps from a different dealer who had it on consignment from a collector!

The unanswered question is: What could YOU sell it for? How liquid is a truly rare coin? Who is the next potential buyer? And if you have to sell on short notice, at what price can you sell this item back onto the wholesale market? And how do you find that market?

The truth about markets is that some are more liquid than others. A true market, such as that of commodities and listed securities, features narrow spreads and a completely transparent cost structure. You always know where you stand in a true market, as narrow bid/ask spreads are published constantly, and the costs of transactions are in plain view.

But in the unregulated and arcane world of collectibles, the general rule is ‘caveat emptor’ (let the buyer beware). The key word in collectibles is mark-up, not market.

BOTTOM LINE: When a non-collector purchases a collectors item as an ‘investment,’ a future loss of his or her capital is almost guaranteed.

- Richard Smith

IN TWO WEEKS: We’ll have a few laughs looking at how U.S. rare coins have performed as an "investment" over the past 25 years. Why no coin dealer, broker or salesman can demonstrate a winning track record in rare coins since 1980. And how rare coin marketing falls through the cracks between consumer and investment fraud. Stay tuned.


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