By Charles Morgan and Hubert Walker
Up until now, Hubert and I have kept mum on gold coins. We feel that there’s more than enough great analysis at CoinWeek to satisfy gold bugs and collectors, who are looking to ride the gold wave as it continues its decade-long ascension. But when we watched David Hall’s October 5, 2012 edition of the Weekly Coin Market Commentary over at PCGS.com, it got us thinking about a topic we rarely see covered. Do rising bullion prices pose a threat to the rare coin market? In other words, is there a point when gold becomes so valuable, that it puts gold coins beyond the reach of enough collectors to degrade or totally erase the numismatic value of gold coins?
In the video above, David Hall predicts that gold is heading to $5,000 or $10,000 an ounce within the next five years. Such levels would shatter gold’s adjusted for inflation peak price of $2,239.67, which it reached on July 21, 1980. Unfortunately for those invested in gold at the time, this peak marked the end of the gold bubble. By 1985, gold had lost half of its value. Gold remained a net loser until 2001, when it slowly began to pick up steam (no doubt due to several reasons: our exploding national debt, global insecurity over terrorism, a shaky economy, and pure speculation on the part of nation states and institutional investors).
As gold continued its climb, the mainstreaming of gold investment began to take shape. When it comes to gold, we see two separate Americas: one that hoards gold (certain posh shopping areas even have gold ATMs that dispense gold bars and coins at spot price), and one that liquidates gold for cash at one of the thousands of cash-for-gold businesses that have popped up in recent years.
Gold as an investment vehicle has become so prevalent, that it is impossible in this day and age to avoid a gold coin sales pitch.
One of the most humorous of these sales pitches appears frequently on AM radio with a female voice-actor pretending to be a news anchor breaks from a faux-program to read what she alleges is breaking news, but is in reality a misleading hard sale gold coin sales pitch. She announces that "Company A" has recently purchased a hoard of beautiful, uncirculated, and rare classic U.S. gold coins from Europe and is providing customers with the “golden opportunity” to hold one of these classic treasures in his or her own hands.
We fundamentally loathe sales pitches for numismatic items geared towards the unknowledgeable. You can almost always count on the sales pitch not being exactly truthful and the coins in question not being exactly what they are purported to be. At the very least, you can be assured that the price of such “collectibles” will not be in line with the traditional coin market.
Ads like this strike a nerve with our contrarian world view. The fact that there aren’t enough gold buyers in the numismatic community to buy these coins, forcing companies to pitch them at laypeople, makes us think that gold prices are already too high for common-date gold coins to be anything more than a vehicle for owning gold, and if Mr. Hall is right about where gold is heading, that gold might become too expensive for all but the rarest gold coins to maintain their numismatic value as well.
Mr. Hall’s low and high end projections would represent an historic bull market for gold.
Have you ever heard the expression that McDonald’s sells more beef than Ruths’ Chris Steak house? The point being that the scale of the economy at the low end is much larger than it is at the high end. There are more consumers for hamburgers than for $60 filet mignons. The coin hobby works the same way. Think of the hobby as a funnel. At the widest point of the funnel are common, inexpensive, and easily accessible coins.
This is the kind of material that a beginning collector might buy; the kind of material that inevitably gets recycled again and again through the hobby.
Here you have your post-silver proof and mint sets, low grade and problem pieces, and your common date Peace and Morgan dollars. As the funnel narrows, prices and the quality of the pieces available begin to rise.
You begin to find yourself in the realm of certified coinage, of gem and better grades, coins with Full Bell Line, Full Head, or Full Step designations, semi-key date coins, and so on…. The higher the prices go, the narrower the funnel gets. Somewhere along the way, you cross the threshold where you get to gold coins.
We’re not suggesting that one has to be rich or be an especially sophisticated collector to buy or own gold coins. While gold coins, as a focus, has primarily been a subject for the well-heeled and the elite, collecting common date and readily abundant gold coins has historically been within the grasp of that middle tier collector who operates in the narrowing segment of the funnel. With rising gold prices, however, even common date gold is getting out of reach for these collectors.
The chart below illustrates the point. In 1999, common date gold coins, particularly quarter eagles (due to their cheaper price point) and double eagles (due to their historical importance) derived a significant portion of their overall value from numismatic sentimentality. Since then, as gold prices have risen, we’ve seen an erosion of this value.
In short, classic gold coins have been numismatic losers over the past twelve years (while being bullion winners; this point is undeniable).
In this period, the common date quarter eagle appreciated by $2.23, or just 18 cents per year. The half eagle lost $20 in numismatic value since 2000, while the eagle and double eagle gained about $20. Adjusting for inflation, even the winners are losers.
Of course, gold is more valuable now, and if one bought gold coins in 2000 and held them until 2012, they would have reaped the benefits of surging gold prices. But, as a collectible item, common date gold is done.
There are not enough collectors who can afford gold type coins to consume the available inventory. Gold is too expensive for sellers to hold onto waiting for a customer to pay that retail price point. Without more demand than supply, price inflation beyond what the market will bear for the metal is artificial. You can underline that sentence, as it is the most important thing you need to know when considering the purchase of classic U.S. gold coins.
Collectible or Asset?
Now that we’ve registered our opinion that common date gold coins at these prices are bullion assets and not collectibles, it is up to you to decide your approach to buying and selling gold coins. We suggest that you familiarize yourself with the commodities market and buy that way. Or at least approach buying gold from dealers the same way you’d buy from a bullion seller.
In other words, if you are in the market for a $20 Saint Gaudens coin that is not rare, it should not matter if the coin was graded MS-62 or MS-63. The market is agnostic concerning condition as it is about the condition of gold ingots. It’s the bullion that’s important, not how pretty it is.
Paying a premium for a common date coin in a slightly better common grade is no way to approach things. For starters, you are paying more for condition on the assumption that higher condition coins are more desirable. While this might be true in a vacuum (we as collectors do like quality coins), it doesn’t work when it prices most collectors out the market and there are more similarly graded pieces available than the market for collectible gold coins can consume. A commodity investor buys and sells when market conditions dictate. Approaching the buying and selling of a coin from a collector’s standpoint will mean that you pay too much at the start and have to wait too long at the end to move the piece. Don’t do it that way.
We’d like to take this suggestion one step further. Take a look at your preferred coin price guide. Every gold coin that is not substantially more expensive in MS-60 than melt (let’s say at least double, possibly triple melt) should be treated as bullion. Approaching things this way will allow you to get good deals numismatically, but stay within market conditions when it comes to the price of gold.
A pro tip is to look for gold coins at cash-for-gold shops, as they do not like being stuck with gold coins that they hope will make them more money than melting old necklaces and rings. Oftentimes, gold is too expensive for these shops to get any kind of premium for the coins. Offer a little more than melt, and you will probably get the coins.
We pulled the next screen capture from CoinInfo.com. The header reads: Common Traded US Gold. This title gives away the store. These are common coins. According to the table, at a gold basis of $1760 per ounce, an uncirculated $5 Liberty has a dealer bid of $475, or approximately $50 above spot price. A slight premium is offered for grades MS-63 and below if certified by PCGS or NGC. Dealer Bid for common coins is the closest true approximation of a coin’s value that you will find. For raw coins, dealers place the numismatic value of gold coins at 10% above spot. For certified coins, the premium is a bit more, however, once you factor in the costs associated with having coins certified (for a classic gold coin that cost approaches $50), the 10% premium holds until you arrive at coins that are conditionally rare.
The 10% premium that dealers are willing to pay above melt is so de minimis that we wonder if even this 10% premium is a mirage.
According to the aforementioned radio ad selling gold, “Few Americans have ever seen gold coins”. At these prices few ever will.
To further illustrate our point, let’s take a look at another screen shot, this one pulled from PCGS.com the week of October 8th. After a two day slide saw gold retreat nearly ten dollars, the section of the $5 Liberty price guide that is primarily made up of common coins looks like a bloodbath. Although we give props to PCGS for constantly making nominal price adjustments, one has to consider how real the numismatic value of a coin is when the slightest change in gold prices - in this case less than ½ of a percent - would project such visible declines across the board. Note that the higher end coins are not effected. But ask yourself, how long would these prices hold if gold took a marked downturn?
Even religiously updated price guides such as this are hardly scientific. Remember, McDonald’s sells more beef than Ruth’s Chris. Who do you think sells more common date classic US coins? Dealers, or bullion sellers?
It’s been 116 years since William Jennings Bryant gave his famous “Cross of Gold” speech at the 1896 Democratic National Convention. speech, famous for its full-throated advocacy of bimetallism, pitted the wealthy and well-connected, who wished to retain the gold standard, against a coalition of “producing masses” who wanted free silver and saw it is as a way to grow the economy and inflate the monetary supply. At that time, the socio-economic class that a person belonged to strongly The influenced whether they were in favor of gold or silver.
Milton Friedman, who wrote a working paper on the subject, felt that Bryant’s speech was already too late, that the damage caused by the Act of 1873 was too massive to undo, and that “Bryan was trying to close the barn door after the horse had been stolen” . Then, as is the case now, gold was not without its controversies.
Ultimately, those looking for a return to the gold standard are in for a disappointment. A return to gold would not be a panacea that cured national economies burdened by years of fiscal irresponsibility; it is also not a bulletproof store of wealth as others would have you believe. It is what it is, for better or worse, and at these prices, the stakes are high enough that you should go into any gold investment with a dose of sobriety.
Gold may be a great investment and indeed David Hall might be right. We just don’t believe that common gold coins are worth a dime over melt, and at this rate the continued rise of gold might wipe away the numismatic value of semi-common and uncommon gold coins as well.
FLIP OF A COIN:
Anthony Paquet, perhaps not one of the better Mint artists, was appointed to the position of assistant engraver in 1857. Numismatic author Don Taxay said Paquet's work had a "peculiar ugliness". His only circulated design was a particularly unsatisfying reverse used to strike some 1861 double eagles. The Paquet reverse may not be much to look at, but it is a highly prized coin for series' specialists.
Honoring George: George Washington directly oversaw operations at the First Mint in Philadelphia. Numismatic mythology suggests he lent his silverware to the cause of producing the nation's first coins (a doubtful claim). On February 22, 1860, the Mint opened the largest of its kind collection of medals honoring our first president and commanding general of the Continental Army. A great account of this collection can be found in W. S. Baker's The Medallic Portraits of Washington, published in 1895 but reprinted since.
It's been that long? The last Kennedy half dollars struck for circulation were minted in 2001. The denomination's long decline was probably inevitable. Retaining its proportionally large size when the coin's composition changed to Cu-Ni clad didn't help.