News and Analysis of scarce coins, coin markets, and the coin collecting community #50
A Weekly Column by Greg Reynolds
I have been asked why markets in rare or very scarce U.S. gold coins have not dramatically increased as the value of gold bullion (the price of the metal itself) has soared over the past year and has reached record highs, above $1500 per ounce! One sophisticated collector-dealer is puzzled that rare coin prices have not even returned to levels that prevailed during the incredibly hot period from 2006 to the middle of 2008. Indeed, during July or early August 2008, a long boom in rare coin markets peaked. Current prices are 10% to 30% lower than those levels, for most scarce or rare coins.
I. Recent Prices
The market price of one ounce of gold was around $1153 on April 23, 2010 and more than $1507 on April 22, 2011, according to Kitco.com. In April 2009, and also in April 2008, gold was around $900! At some point in the Spring of 2006, it was near $560! So, the gold bullion price increased more than 30% in twelve months, more than 67% in twenty-four months, and around 80% in five years.
The CU-PCGS index shows rare U.S. gold coins trending downward in price over the last twelve months, especially during the first three months of 2011. My research suggests that this is not true.
In my column of March 16, I wrote about Changes in Demand for Rare U.S. Coins So Far in 2011. I concluded that prices for rare, or at least scarce, silver and gold U.S. coins were, more or less, the same as these were in the beginning of last year. I did then find, though, that rare or at least scarce gold coins have been rising in value in 2011, though just slightly.
Now, in late April, John Albanese reports that “rare gold coins are about 5% higher than a year ago.” Albanese was the founder of the NGC in 1987 and he started the CAC in 2007. While I have no reason to doubt that CAC approved rare gold coins are at least 5% higher, on average, my impression is that prices for rare or very scarce U.S. gold coins in general are about 2% higher on average.
II. Generic Gold
Beginners often confuse generic gold with rare date gold. Consider that 1927 Philadelphia Mint Double Eagles ($20 gold coins) are very common, well over a half million 1927 Double Eagles exist. Thousands are available that have been PCGS or NGC certified as grading MS-64 or MS-65. In contrast, 1927 San Francisco Mint Double Eagles are very rare.
The Denver Mint Double Eagle of 1927 is a Great Rarity. Most collectors of Double Eagles will never see a 1927-D in their respective lifetimes. I feel fortunate to have been able to examine six.
Philadelphia Mint Double Eagles of 1924 and 1928 are even more common than those of 1927 and are of interest more to speculators than collectors. Generic U.S. coins are true coins, though, not bullion products.
Investors find markets for generic gold coins to be puzzling, and tend to buy either bullion products or truly scarce U.S. coins instead. Consequently, markets for generics are dominated by players in 'the game' and their clients. There are quite a few dealers who specialize in generics. Many such dealers speculate with their own funds or those of their clients.
Speculative frenzies in generics tend to follow paths of their own, apart from bullion markets and markets for rare coins. As a result, generic gold coins can go down in value when gold bullion rises. Demand for generics is also a function of marketing programs by investment firms that promote generics.
The premiums that generics bring over their respective bullion (metal) content may fluctuate tremendously, especially during time periods when gold is volatile, but at other times as well. While the price of gold bullion has risen 30% over the past year, prices for many, widely traded generic U.S. gold coins have actually fallen.
III. Demand for Gold Bullion
The main question here is why changes in demand for gold are not matched by changes in demand in rare or at least significantly scarce U.S. gold coins. It makes sense to reflect upon the reasons why people buy gold bullion.
By gold bullion, I am primarily referring to common one ounce 'coins' and non-antique, nearly pure gold bars of various weights that are sold and/or produced by widely recognized entities. It is typical for a government produced bullion product to be designed to meet the legal criteria for a coin, yet these are not considered to be coins by most coin experts. American Eagle, Canadian Maple Leaf, and Australian Nugget, gold 'coins' are all bullion products.
People may 'invest' in gold though paper or electronic means by buying shares of entities that hold gold or are otherwise involved in markets for gold. I contend, though, that price changes are primarily driven by the trading of gold in physical forms, via bars and one ounce 'coins'!
Curiously, Scott Travers asserts that recent price increases in gold bullion are largely a result of demand by people who are not taking physical possession of the metal. “The increase over the last twelve months is not being caused being caused by people going to coin or precious metals dealers,” Travers reports. Scott is an accomplished author, a rare coin expert and an investment advisor regarding tangible assets.
“Over the last twelve months, much of the demand for gold is coming from Exchange Traded Funds (ETFs), governments and hedge funds,” Travers finds. “This kind of move takes really big money, serious money, a whole new generation of buyers,” Travers continues. “New investors are comfortable investing in gold bullion without holding the physical metal,” While Scott recommends that gold bullion investors take possession of their gold, as a physical metal, Travers wonders if this “new generation might be right” about trading gold via paper or electronic means?
Why do people buy gold bullion, in one form or another? It is traditional for people to invest in gold when they are concerned that the currency of their respective nations will substantially fall in value. (I am not providing investment advice in this column and I am not implying that investments in bullion will be profitable.)
Why has gold risen from $1150 to $1500 over the last twelve months? The U.S. Federal Government does not seem to be getting a handle on the annual budget deficit and is not implementing a plan that will substantially reduce the aggregate Federal debt. Investors are concerned about the power of the United States and the temptation for present or future administrations to effect polices that will result in more than a little inflation.
Travers points to “a global currency crisis and multi-trillion dollar deficits.” Gold buyers have an “anticipation of inflation.” Travers expects inflation in the U.S. to reach the neighborhood of “12½% within three years.”
In my view, political instability and recently emerging conflicts in the Middle East are the primary reasons why the price of gold has increased so much over the last six months. The President of Egypt was pressured to resign by a domestic uprising, as was the President of Tunisia. The President of Yemen is currently negotiating with opponents of his regime and may be willing to resign. There have been aggressive political demonstrations in Saudi Arabia.
An anti-government uprising in Bahrain is more important than many people realize as the Fifth Fleet of the U.S. Navy is headquartered in Bahrain. This fleet is widely viewed by the citizens of the U.S., and of other affluent industrialized nations, as a stabilizing force in the region, one that insures a steady supply of oil.
“There is an outbreak in people, and organized political groups, favoring democracy,” John Albanese notes. “There is a lot of uncertainty. It could all work out in the Mid East or it might not.” It is too early to predict the outcomes of conflicts in the Middle East. John asserts that “there is a perception that the U.S. can't do much about the situations in the Mid East. People think that the U.S. has less power and [American] investors are concerned about the ability of the U.S.” to influence events, Albanese points out.
I believe a central factor is that the NATO air offensives against the forces of the loony Libyan dictator are, so far, disappointing. The forces of the Libyan Government appear to have, at least for a time, turned the tide against the rebels.
It would be a disaster for a Libyan dictator to, in some sense, be able to claim to have defeated the U.S., France and other NATO allies. While the rebellion will probably be successful, the uncertainty and the possibility that the Libyan dictator, Muammar Gaddafi, may prevail has contributed to an increase in gold bullion prices.
According to the Wikipedia, in the 1970s and 1980s, “Much of the [Libyan government's] income from oil, which soared in the 1970s, was spent on arms purchases and on sponsoring militancy and terror around the world.” Support for this point could easily be found in academic books written by experts. Gaddafi has been the dictator of Libya since 1969 and is widely regarded as potentially being a danger to the U.S., Britain, Saudi Arabia, and U.S. political or business interests in the Middle East.
“People buy gold when they are afraid,” Albanese emphasizes. “People are worried about their savings. They are scared of the U.S. losing position in world leadership; people are worried about the U.S. Dollar collapsing or just falling much further,” John says.
Albanese ties the increases in the price of gold bullion with “global uncertainty” and he also emphasizes that some people buy gold because others are doing so. Kris Oyster believes that “the reason rare coin prices are down or static is that many people are selling rare coins to get on the metals train, even at a loss in some cases.” Oyster is the managing director of numismatics for the Dallas Gold & Silver Exchange. “Everyone is in a frenzy to buy gold and silver,” Kris declares.
On the “surge in precious metals prices” over the “last year,” Bob Green, likewise, asserts that “typically, when the market goes up [a great deal], everyone wants to get on board, generally in the final stages of a bull market,” Green explains. “This is by no means a phenomenon, as it takes place cyclically, and many industry old timers have seen this 'jump on the bandwagon investing' during our careers,” Bob reveals. Green is the president of Park Avenue Numismatics.
John Albanese finds that “a lot of people are buying gold and silver just because prices are going up, like the Internet stock bubble in 1999 and 2000.” John believes that bullion prices could sharply decline at some point in the not too distant future. Travers disagrees and Scott argues that “there is not a bubble” in demand for gold bullion.
Because of government budget deficits, and the fact “many people in India, China and elsewhere in the world are now buying gold,” Albanese does not think that gold will fall to previous lows. Even so, John suggests there are plausible scenarios that would result in gold and silver bullion prices falling substantially in the near future.
“A year from now, if there is less unrest in the Middle East,” a better situation in Japan, “lower gas prices,” and “a reasonable deal among U.S. politicians about cutting the deficit” people would be much less scared; gold would fall and prices for rare gold coins would probably go up,” Albanese imagines.
I emphasize that the economy of the whole world is substantially dependent upon oil flow from the Middle East. Instability and brewing conflicts in the Middle East have spurred investors to buy gold.
In sum, it is a tradition to acquire gold when investors are concerned about economic growth, the costs of war, and unfavorable shifts in the balance of political power. Situations in the Middle East, however, could turn out well for the U.S. and other capitalist democracies.
A stable, peaceful democratic regime could replace that of Gaddafi in Libya. Real, positive reform could occur in Bahrain and even in Saudi Arabia. Upcoming governments in Egypt, Tunisia, and Yemen may prove to be helpful in promoting peace, democracy and economic growth.
IV. The Demand for Rare Coins
Why are investors in gold bullion not also buying rare U.S. coins? Perhaps this is not a logical way in which to pose a core question. Investors in gold bullion and buyers of rare U.S. coins are two, very different groups of people. There is some overlap. Even the overlap, however, may be misleading; an investor in gold may also be a collector of rare U.S. coins.
Most investors have little knowledge of rare U.S. coins. More people are interested in gold in general than in rare U.S. gold coins. Most investors are aware of the traditions cited above regarding the purchase of gold. For more than two thousand years, investors have been accumulating gold for such reasons.
Many buyers of gold are not U.S. citizens and are not interested in U.S. rare coins. The Central Bank of India purchased a large quantity of gold bullion in 2009. In 2011, citizens of China, India and Brazil have been buying startling quantities of gold. Furthermore, Russians, Germans, Africans, and people in Latin America, have been buying gold as well. People throughout the world are concerned about the budget deficits of the U.S. and British national governments and about political instability in the Middle East.
It is testimony for the strength of markets in rare coins that rare coin prices did not fall much during the severe recession that started in 2008. If analyzed within the framework of the overall U.S. economy, rare coin markets were very strong during the recession and in the current problematic economic climate.
Rare coin markets “had a mini-crash in late 2008,” Albanese remembers. Rare coin prices “were not falling 40% to 80% like they did in other recessions. Prices were down 20% to 30%.” Furthermore, while “1991 was a disaster for the economy, it was not as bad as 2008,” John says. Coin prices fell more in the early 1990s than they did in 2008 and 2009. According to Albanese, the rare “coin market crash of 1980” led to prices for many rare coins falling from 60% to 90%!”
“In March 1980, quarters of the 1880s in superb mint state, sixes and sevens [by current CAC standards], were bringing over $20,000 [each] wholesale. In August 1982, such quarters were selling for around $2,250,” Albanese recollects. This is an example relating to his larger point.
It is important to stress out that the price run-ups in 1979-80 and 1989-90 were more intense and of greater magnitude than the price increases in rare coins from 2006 to the middle of 2008. In comparison to the rare coin market booms of 1979-80 and 1989-90, the rare coin market boom of the 2000s was longer and price increases took more time. Moreover, there was not a significant increase in the number of collectors in 1979 or in 1989. From 1998 or so to early 2008, there was a boom in coin collecting.
Many non-investing collectors, and 75% collector-25% investor types, joined the coin collecting community between 1998 and 2008. There is now a larger base of collectors. (Please see my piece on The rise in the number of collectors of rare U.S. coins and the importance of the PCGS & the NGC.)
The demand for rare U.S. gold coins is dominated by collectors. Certainly, most collectors are, at least in small part, investors. When it comes time, for whatever reason, for coins to be sold, the sellers usually wish for buyers to pay substantial amounts. Importantly, however, collectors of rare coins do not view coins in the ways that investors view stocks, commercial real estate, or bullion.
A rare coin buyer who is 75% collector, and 25% investor, would like to make a profit from his hobby, yet may be primarily interested in the cultural pursuit of coin collecting. After all, a coin buyer who is 75% collector would be someone who enjoys acquiring coins. The opposite would be someone who is 25% collector, 75% investor, who would think often about prices and profit opportunities. Even such a '25% collector,' however, would likely be gaining satisfaction from the pleasure and/or cultural aspects of coin collecting.
Collectors are concerned about buying coins that they like and coins that are prized within the coin collecting community. Coin collectors are more concerned with traditions of coin collecting than traditions in investing. Coin collectors are often focused upon completing sets or on buying coins that have been traditionally regarded as being significant in the history of coin collecting. (Please see my three part series on Collecting Naturally Toned Coins; click here for part 1.) For most collectors, investment issues are a secondary consideration.
VI. Rare Gold Coins & Gold Bullion
There is a minimal relationship between prices of gold bullion and prices of rare gold coins. Sometimes, increases in the price of gold will push prices of some very scarce gold coins upwards, especially coins in very low grades or those that have serious problems.
Generally, rare U.S. gold coins sell for much more then the value of their respective bullion content, so called 'melt value.' I contend that the prices of the overwhelming majority of rare gold coins are not substantially affected by changes in the price of gold bullion.
©2011 Greg Reynolds