Defining The Line Between Precious Metals and Numismatics
By Jay Rudo
A question that collectors often ask is what makes a coin bullion and what makes a coin numismatic. There are a lot of different factors involved to answer this question and this article will look at many of them. Having spent a career dealing in both rare coins and bullion I feel I can offer a lot of perspective on the subject. There are times that a coin that is designed to trade as bullion but catches the collector’s interest and some very interesting things happen. The classic example of bullion coins becoming numismatic is the Silver Eagle program started by the US mint in 1986. These coins are .999 fine 1 ounce silver coins struck in uncirculated and proof condition. The US Mint never designed the uncirculated coins to be collector coins but as a vehicle to buy bullion. They do not even offer them directly to the public but instead they are sold to large Mint distributors who in turn sell them to investors, coin dealers, and bullion dealers.
From the silver eagle program’s inception they became a favorite with coin collectors. Collectors bought them in massive quantities. They put them into their collections and kept up with the series year after year with great enthusiasm. As time went on and the market matured, quality became more and more important. The grading services started grading and encapsulating silver eagles. The fact that NGC alone has graded and encapsulated close to 5,000,000 silver eagles is a testament to the coins popularity. Certainly the premium that a person pays for a certified silver eagle excludes it from being defined as a bullion coin in the classic sense of the term, particularly if the coin is graded as Mint State or Proof 70.
For example the current retail price for a 2012 silver eagle graded MS70 by NGC is $98. The coin has $28 of intrinsic silver value based on the spot price of silver today (6.20.2012). Does this mean that silver eagles are sometimes numismatic coins? Yes. Does this mean that silver eagles are not bullion? No. Confused? Let’s take a look at a few definitions, a brief history of the gold bullion business, and see how coin collecting has influenced the market.
We define precious metal bullion as: Any refined precious metal, such as gold, silver, platinum, and palladium, which is in a state or condition where its value depends primarily upon its precious metal content and not its form. The majority of the time when purchasing bullion it can be found in the form of bars or coins. The value of the item directly corresponds with the rise and fall of the value of the underlying metal. If someone has a 1 oz. gold bullion coin and the price of gold goes up $5 an ounce then the price of the coin also increases by approximately $5, whether it is retail or wholesale pricing.
The premium over the precious metal price comes from: The cost of manufacturing, profit by the seller, and market conditions. As a general rule the smaller the coin the higher the premium will be over spot. The theory here is that it takes less effort to make a single one ounce gold coin than it does to make ten 1/10 ounce gold coins. It also takes the same effort to sell a one ounce gold coin as it does a 1/10 ounce gold coin. One ounce Gold Eagles sell for approximately 4% to 5% over its spot price. 1/10 ounce gold eagles sell for approximately 15% over its spot price.
As a rule of thumb I feel that in order to be considered purely bullion, a coin or bar has to trade at 7% or less above its metal content to qualify. Coins that sell at between say 8% and 20% over the value of the metal could be labeled as “bullion related” or “semi-numismatic”. Once over a 20% premium I think you’re into Numismatic territory even though the value of the precious metal still plays a major role in the overall value of the coin. Even though these numbers may seem arbitrary, I feel that most in the marketplace would accept this definition and to put it simply, it makes sense.
A question we are often asked is “What is the difference between buying coins and buying bars? Which way is better?” For all practical purposes a gold coin is a circular bar, except that they are guaranteed by a government instead of a refinery, and have a denomination. US Eagle coins are all legal tender. The 1 oz Gold Eagle has a denomination of $50.00 struck on the coin. Theoretically, a person could walk into Wal-Mart and spend it for it’s $50.00 face value. Not a wise thing to do, but perfectly legal.
Gold coins are also struck in large quantities and struck efficiently enough, that their premiums are competitive with bars. Bars are produced by large refineries or banks. Often each bar comes with its own serial number. In addition, the premium over gold for smaller bars is not that much different than commonly traded bullion coins. It is for this reason and because the coins are struck by a country’s government, many if not most prefer coins.
The one exception to this rule is the investor that wants to buy very large quantities of bullion. Kilo bars or 100 oz bars carry a very small premium and you will get the most metal for your money. The disadvantage to a gold bar of this size is that when you go to sell it you have to sell it all at once. It’s all or nothing. You can’t break apart the bar and sell it one ounce at a time, like you would be able to if you bought 1 oz coins. There are also a limited number of dealers that will buy the bars without an assay which requires time and money. Another disadvantage of bars is that in some states dealers have to hold the bars for a certain period of time after purchasing because they are governed by the secondhand precious metals laws. They are required to report their purchase and hold the bar the same way as used jewelry.
The bullion business in the United States is a relatively new business. Many people don’t even know that it used to be illegal for Americans to own more than 5 ounces of bullion gold. Until 1933 the United States was on the gold standard and when we were taken off it became illegal. There were some exceptions made for people that used gold in their occupation such as dentists, artists, and sign makers. In addition it was legal to own gold coins that had a numismatic or collectors value. It’s hard to believe but at the time Americans were required to turn in their gold for dollars that were not backed by gold. I remember my Grandfather telling me about how he turned in his gold coins without a second thought. Imagine what would happen today if the government asked us to turn in our gold. It would make occupy Wall Street look like a walk through the White House rose garden. The deadline to turn in the gold was May 1, 1933 and after that the official price of gold went from about $20 an ounce to $35 an ounce. The official price of gold after the May 1st deadline skyrocketed from $20 to $35 an ounce: an increase of about 75%. After considering inflation, $35 is about $600 today to give some perspective on the price jump.
The bullion business was virtually nonexistent until 1964 when the US Mint announced that due to the high cost of silver, circulated coins would no longer consist of 90% silver. The mint began to produce coins in a much more cost effective way with the use of clad. This sparked interest in precious metals as an investment. Even though it was still illegal to buy bullion gold during that time period, people found ways though the options were limited. There was the British sovereign, French 20 Franc, Mexican 50 peso and the Austrian 100 Corona. That was it! Then in 1967 a coin was struck that changed everything. South Africa began production of the one ounce gold Krugerrand. This was the first time that a government backed coin was available in a one ounce denomination and it was an instant success!
After a 41 year gold bullion prohibition, it finally became legal to own bullion on August 15, 1974. As a result the Krugerrand’s mintage went from 40,000 coins in 1967, to 3,204,000 in 1974! Other countries quickly followed in South Africa’s footsteps. In 1979 Canada came out with the gold Maple Leaf, followed by the silver maple leaf in 1988. Mexico created the gold Libertad in 1981, and the silver Libertad followed in 1982.
The demand for bullion was growing and this caught the interest of the US Mint. In 1986 they launched the Gold and Silver Eagle program. This program completely changed the landscape of the bullion business and had a great impact on coin collecting. It consisted of:
- 1 oz silver eagles
- 1/10 oz gold eagles
- ¼ oz gold eagles
- ½ oz gold eagles
- 1 oz gold eagles.
It was an instant success and sales of the one ounce coins broke five million the first year. In 1997 the program was expanded to platinum coins. In 2006 the bullion program was expanded even more to include 1oz .999 fine gold Buffalo coins.
While the eagle program was designed to offer American bullion to buyers in an easy and affordable fashion, some interesting things developed that no one could not predict. Collectors became students of the series. Issues like mintage, quality, and varieties came into play to turn some of that bullion into numismatic items desired by collectors.
Credible third party grading by NGC and PCGS came into play in the late 1980’s to change the way many numismatists collected coins. As the market for bullion type coins evolved collectors began to seek the highest possible grade with many willing to pay a substantial sum to get them. This is where the grading companies stepped in and started grading modern bullion coins. As the market matured the demand for Mint State 70 (MS70) and Proof 70 coins exploded. Now remember these coins were mostly struck in massive quantities, and except for proofs were intended for the bullion buyer, not for collectors. The mint was looking to offer a quality bullion product. Their intention was not to make perfect coins.
In some series of coins, finding a coin that grades MS70 is virtually impossible. The most dramatic example of this is the 1999 silver eagle. The mint struck 7,408,640 coins. Of the total mintage, NGC has graded 71,906 of them. As of today, only 78 have been graded MS70! A single 1999 Silver Eagle graded MS70 by NGC sold at auction for $24,150! You read that right… $24,150!!! The exact same coin in Mint State 69, one point less, retails for $59. Extreme? Yes. That is the point.
The numismatic value in bullion coins is certainly real and supported by a huge number of collectors that want to build a collection they can be proud of. There are many wrinkles and intricacies like this one in this dynamic and ever changing market.
Getting a graded 70 isn’t the only way a bullion coin becomes numismatic. Sometimes collector’s value is created by good old fashion rarity. Many modern coins have very low mintages. Some of the ½ ounce uncirculated gold coins have low mintages and are highly collectible. The coins struck between 1988 and 1992 are the most desirable. Here is a breakdown of the years, the mintage, and their approximate retail prices for coins that grade MS65 or better:
- 1988 Mintage 45,000 $1,475
- 1989 Mintage 44,829 $1,475
- 1990 Mintage 31,000 $1,850
- 1991 Mintage 24,100 $2,450
- 1992 Mintage 54,404 $1,145
Additional mintage information can be found here: www.moderncoinmart.com/mintages
To give some perspective, a 2012 half-ounce Gold Eagle’s retail price is $882 based on a gold spot of 1,620.
A third way that bullion becomes numismatic is through minting varieties. There are two noteworthy times that the US Mint unintentionally created variety coins: the 1999-W $5 & $10 Gold Eagles and the 2008-W Reverse 2007 Silver Eagles.
In 1999 there was a huge wave of buying as a result of the panic created by Y2K. Many people believed that our computers would all crash and chaos would ensue when the calendar went from 1999 to 2000. In the rush to produce enough coins to meet demand the US Mint used unfinished dies that had the W mint mark and were meant to strike proof coins. No US bullion coin is supposed to have a mint mark. These unfinished proof dies with the “W” mint mark were used to strike uncirculated $5 gold eagles and $10 gold eagles, and the result was very valuable and highly sought after coins. Eric Jordan and John Maben, authors of “The Top 50 Most Popular Modern Coins” estimated that there are only 6,000 of these coins each. In Mint State 69 condition the retail prices quoted in the book are $900 for the $5 coin and $1600 for the $10 coin.
The second major variety created by the US Mint bullion program was the 2008-W Reverse of 2007 Silver Eagle. In 2008, the Mint slightly changed the shape of the lettering on the reverse of the Silver Eagle. There were some dies left over from the year before that someone, hopefully with the intention of saving the mint money, used for 2008-W coins. Again using the “Top 50” book as a reference, it is estimated that there were less than 46,318 of this particular variety produced. The retail value of this coin in an NGC MS 69 is $500.
There are also times when coins begin as numismatic issues and then evolve into bullion coins. It looks like, at this moment in time, Proof Gold Eagles that are uncertified and of average quality fit in that category, though that could well change. Along with the uncirculated eagle program the US Mint struck proof gold, silver and platinum coins that they sell directly to the public. The Mint charges premiums for these coins that are higher than the uncirculated version since the coins were struck for collectors in proof condition and were housed in velvet boxes.
In the past year the premium on proof gold eagles in the secondary market has collapsed. When I refer to a secondary market I mean a place where you sell your coins after buying them from the mint or company that initially distributes a product. The mint sells proof eagle coins directly to the collector at a higher rate over the spot prices. When the initial buyer goes to sell their coins, at this time due to current weakness, they won’t get the premium they paid over the spot price of gold back.
Right now proof gold eagles are worth gold spot price plus roughly $100 an ounce on a wholesale basis. Historically that is a low premium. For someone that wanted to own bullion it might be a good play. There have been times in the past three years that the premium has been over $300 an ounce. Does that mean history will repeat itself? No one knows, but right now uncertified proof American Gold Eagles are trading almost at the equivalent prices of their uncirculated, bullion counterparts. It’s hard to imagine the premium over spot ever going lower than today’s level.
There is another situation we often see where numismatic coins become more characteristic of bullion coins. Many countries around the world issue gold coins to sell to collectors. These sets are often sold at high premiums over their metal content. While some are winners, many of these sets do not hold their value and when the original buyer goes to sell them they do not get that premium back. The sets then trade for their bullion value.
I often see beautiful sets from Great Britain, Canada, Mexico, Australia, and South Africa, that originally sold for double or triple the actual gold content. I am often able to buy these from other dealers for 5%-10% over gold. It’s sad to see but it is also a great opportunity for someone that wants to buy a collector’s item, but also wants the comfort level that comes with buying precious metals.
The bullion related or semi-numismatic category is one where the coins are in between, hence they could be considered both bullion and numismatic. These are coins whose premiums exceed that of traditional bullion, have collector value, but whose price is still directly associated with the underlying metal. An example of this is the 2012-W Gold Buffalo graded Proof-70 by NGC. Here is a current year coin graded as high as possible by one of the major grading services and it carries a significant premium of gold spot. If gold goes up a few dollars or down a few dollars the price doesn’t change. If there is a bigger swing, maybe $50, the price of the Buffalo coin will go up and down accordingly. Another example we see is the First Spouse Gold coins where except for the most scarce issues, the price is still directly associated with the underlying metal.
There are many different ways to look at buying modern bullion and numismatic coins. This article gives and overview but it is only the beginning. The best advice I can give a buyer is to keep reading articles like this. Find areas that you like to collect and learn all you can. You will find with a little effort you will know more about your area of expertise than some of the dealers you buy from. That increases the chances of making great buys and contributes to a rewarding hobby.
Jay Rudo has worked in the coin and precious metals business for his entire adult life. After a decade of working as a bullion trader and numismatist for one of the top bullion companies in America, and operating his own successful coin company, he went into partnership with John Maben in 2007 and is now the President of JMRC/ ModernCoinMart. He is a member of the American Numismatic Association, Professional Numismatists Guild, and Florida United Numismatists.