E-MAIL SCOTT TRAVERS BEFORE YOU BUY OR SELL A SINGLE CERTIFIED GOLD COIN
GO FOR THE GENERIC GOLD
A LOOK AT GOLD COIN INVESTMENTSBy SCOTT A. TRAVERS
COPYRIGHT © 1993, 2003 BY SCOTT A. TRAVERS
ALL RIGHTS RESERVED.THE TEXT HAS NOT BEEN CHANGED SINCE 1993
Gold has begun to glitter again, and gold bugs are
exhorting us to climb aboard and strap ourselves in for a
rocket ride to the Moon.
There's no way of knowing how high this hopeful boomlet
will carry the yellow metal. Before we get too comfortable on
the launching pad, however, we ought to reexamine the events
of recent years, especially in the market for generic gold
coins.
It will soon become apparent that far from embarking on
a rocket trip, those who buy gold coins today could actually
be in for a roller-coaster ride.
The fact of the matter is that over the last half-
decade, gold coins have risen in value dramatically in many
cases, only to lose that added value in a relatively short
period of time.
The gold coin marketplace has been shattered by
volatility and by sharp ups and downs that often have little
or no correlation to the current price performance of the
yellow metal itself. This has served to magnify the risks for
those who venture into this market. But at the same time, it
also has created opportunities for those with the savvy and
wherewithal to use the peaks and valleys to their advantage.
At the very outset, it's crucial to understand the
difference between "generic" gold coins and those that are
genuinely rare.
Generic coins are those which exist in sufficient
quantities to be traded as like-kind units--very much like
commodities.
These coins may be in high levels of preservation; more
often than not, in fact, those traded frequently in the
current marketplace are in mint-state condition. But they're
readily available in those grades, so buyers and sellers have
quick access to sources of supply. And one is treated much
like any other, so that these coins are interchangeable.
Common-date Saint-Gaudens double eagles ($20 gold pieces) are
viewed, for example, as generic coins.
By contrast, truly rare coins are one-of-a-kind pieces,
and each has its own personality. Low mintage, not high
quality, is the key determining factor in their value. Some,
of course, possess not only rarity but also exceptional
quality--and that combination greatly enhances their value.
But unlike generic coins, truly rare coins are treated first
and foremost as collectibles, not commodities; they're
regarded as distinctive, rather than interchangeable.
No-motto Liberty Head half eagles ($5 gold pieces)--
those minted between 1839 and 1866 without the motto IN GOD
WE TRUST on the reverse--fall within this category. They're
very scarce as a group, with mintages generally well under
100,000, and flat-out rare in a number of individual
instances.
Precious-metal content forms an important part of
generic gold coins' value--much more so than it does in the
case of rare gold coins. This is particularly true for coins
in high circulated grades such as About Uncirculated-55 or
58, and in low-end uncirculated grades such as Mint State-60
through 62. In these levels of preservation, generic gold
coins are virtually "bullion" coins: They command just a
modest premium over the market value of the metal they
contain, and they rise and fall in value as the precious
metal itself goes up or down in price.
The price differential widens considerably as the grade
level moves up to Mint State-63 and above. And at times when
the market is bullish, the differential balloons even more.
Conversely, when conditions are adverse, the differential
contracts.
Since May of 1989, when the coin market scaled its last
major peak, high-grade generic gold coins have fallen in
value sharply--even though gold itself actually went up in
value slightly during that time: The average price of gold
was $372 an ounce during May of 1989, and this July it
averaged just under $400. But during that span of more than
four years, there have been a number of well-defined points
when these coins rallied. And those who were shrewd and/or
fortunate enough to ride the up-and-down waves in the
marketplace, buying at low ebb and selling at high tide,
could have made--and, in some instances, did make--very
substantial profits.
Let's look at a few examples:
o The Certified Coin Dealer Newsletter (or Bluesheet) of
May 26, 1989, assigned a value of $3,950 to common-date
Saint-Gaudens double eagles graded Mint State-65 by the
Professional Coin Grading Service (PCGS). In early June 1993,
those same coins were valued at $1,440, meaning they were
worth only about 36.5 percent of their 1989 peak value. But
they didn't fall to that point in a straight line. On July 3,
1992, for example, the Bluesheet listed them at just $1,010,
only about 25 percent of their May '89 peak--so between then
and June of this year, they actually rose in value nearly 50
percent. And similar swings, quite dramatic percentage-wise,
have occurred throughout the four-year period.
o On May 26, 1989, the Bluesheet set the market price at
$2,400 for Indian Head eagles ($10 gold pieces) graded MS-63
by PCGS. In June 1993, those coins were worth $1,400, or 58
percent of the peak. But in July 1992, they had been worth
only $790, or less than one-third of the peak. Thus, between
then and June of this year, they rose in value nearly 80
percent.
o On May 26, 1989, the Bluesheet valuation was $3,050
for Liberty eagles with IN GOD WE TRUST graded MS-63 by PCGS.
In June 1993, those coins had a market value of $1,240, or
roughly 40 percent of the peak. But that was still more than
40 percent higher than their value in July 1992, when the
Bluesheet listed them at only $875.
Not all generic gold coins fell as far as these, or have
fluctuated as greatly during the last four-plus years. But
many have experienced significant swings in value, creating
opportunities to buy and sell advantageously--even though the
coin market has remained depressed throughout this period,
relative to its status in May 1989.
Rare gold coins, by contrast, have had no similar
intermediate ups and downs; rather, they have remained
unremittingly depressed. The reason for this is simple: Being
unavailable in quantity, rare coins cannot be promoted
profitably--manipulated, if you will--by numismatic
entrepreneurs, the way their generic cousins can be. Thus,
they don't enjoy the temporary boosts in value generated by
what might be called artificial market stimulation. Instead,
they lie dormant until the market regains more permanent
underlying strength.
Truly rare coins benefit more dramatically than generic
ones when market conditions are bullish--and I consider them
much better buys from the standpoint of long-term investment.
Just as their malaise is more persistent and pronounced
during market slumps, their performance is also more
spectacular and sustained when the good times roll. They have
the potential to soar in value far faster and higher when the
inevitable turnaround occurs--and justifiably so, since they
are more elusive and desirable.
But, as we have seen since 1989, the coin market--like
any other segment of the economy--is subject to its share of
slumps, and these can be protracted. And during such periods,
it's comforting and challenging for action-oriented "players"
to know that there is still some ferment in the marketplace
and they still have a chance to realize meaningful profits on
a short-term basis without having to wait for the possibly
distant light at the end of the long-range tunnel.
Anyone who purchased rare gold coins during the last
four years has probably incurred paper losses; those coins
are very likely worth less today--perhaps a great deal less--
than when they were acquired. And their prices have trended
consistently downward, furnishing little or no window of
opportunity for selling them at a profit along the way.
With generic gold coins, on the other hand, handsome
profits could have been made through judicious buying and
selling.
Many generic coins lost 50 percent of their value
between May 1989 and May 1990, then regained roughly half the
lost value before sinking lower again. This ebb-and-flow
pattern was subsequently repeated twice more. Let's say a
certain coin was worth $10,000 in May 1989 and you bought it
a year later for $5,000. You could have sold this coin for
$7,500 when the market rebounded temporarily, then bought it
back for $5,000--or even less--at the next bottom and sold it
again at a profit when it went up. By doing this several
times, you could have doubled or tripled your money during
the four-year period--in the very teeth of a raging bear
market.
A word of caution: This is a gambler's game--one that
can be extremely risky. In a sense, it's like playing musical
chairs with your money, and it's not something an ordinary
consumer can be expected to do. In fact, even expert dealers
have trouble doing it successfully.
Having said this, the fact remains that most of the
profit-making opportunities in the coin market during the
last four years--short of waiting years for the market as a
whole to turn around--have existed in the area of generics.
While other coins were dropping in price like rocks and then
simply staying low and flat, generics were behaving more like
bungee-jumpers--bouncing up after each plunge and giving
people a chance to cash in their chips.
In this sense, volatility can be--and has been--the
investor's best friend in time of need. And if ever coin
investors needed a friend, the last four years have been the
time.
If you decide to try your luck and gamble on generic
gold coins, I urge you to limit your investment to totally
discretionary funds--money that isn't essential to your
economic well-being.
To play this market properly, you should buy at times
when both gold itself and generic gold coins are relatively
low-priced, compared to near-past levels, and sell at times
when prices are trending upward without economic
justification.
Let's say a certain generic gold coin has increased from
$200 to $500--and we've seen this happen with a number of
gold coins in the last couple of years--and the coin is a
relatively common one of which thousands of examples are
available in a comparable level of preservation. If the only
apparent reason for the price increase is the fact that a
certain company is promoting this coin, then you should sell
it and take your profit (assuming that you purchased it while
the price was lower). Then, when the price comes down again
after the promotion, as it almost certainly will, you can buy
the coin again and wait for another chance to repeat the
sell-buy cycle.
If you believe the price increase resulted not from
promotion but rather from genuine economic justification, and
you believe the justification will last, then you should
consider turning your attention to coins with greater long-
term potential--rare gold coins, for example. Those should do
far better in the long run.
Factors that would constitute true economic
justification include inflation, an expanded money supply and
increased federal spending. Generic gold coins WILL go up in
value in times of high inflation, just as gold itself will go
up. But truly rare coins will go up even more, so that's
where you should turn your attention at such times.
Gold may not be heading to the Moon anytime soon, so
it's probably premature to make a reservation on the gold
bugs' rocket ride.
But roller-coaster rides can be exciting, too--and
possibly even rewarding. So while reconstruction continues on
the coin market's launch pad to outer space, why not enjoy
one of the most stimulating rides now being offered here on
Earth:
Go for the generic gold!
