Small coins, big money

US investors are paying record-breaking prices for old rare coins. But it’s a different story in Australia.

Summary: Investment interest in rare US coins is on the rise, and record prices are being set at auction. But Cliona O’Dowd notes below that the Australian market in old coins has been tarnished through the recent collapse of The Rare Coin Company.
Key take-out: Coin investors should undertake detailed research, talk to a reputable dealer, and check previous records and gradings before making an investment decision.
Key beneficiaries: General investors. Category: Collectibles.

Collecting old coins isn’t what it used to be. Just ask Jeff Garrett, a collector and dealer based in Lexington, Kentucky. He recently bought a minority stake in a 1913 Liberty Head nickel worth nearly $3.2 million. Up to that point, Garrett had thought nothing of purchasing coins of around $100,000 in value, but this, he says, took his collecting “to a new level.” It was both thrilling and a little frightening, he says—“I lost a considerable amount of sleep.”

More and more collectors are getting in on that kind of excitement. While iconic coins selling for more than $1 million used to be headline news, they now seem almost commonplace. The last six months have seen two record-breaking sales, with Stack’s Bowers, a top auction house for coins and paper currency, selling an 1891 $1,000 silver certificate for $2.6 million and a 1794 silver dollar for $10 million. That was the first coin to break the eight-figure barrier at auction.

If history is any guide, those gems will be worth even more down the road. “Coin collecting is a fabulous investment,” Garrett says, “If you look back and see what coins have done in the last 10 years a lot of them have doubled and tripled in price.”

Garrett’s partial ownership of that nickel could itself be an excellent investment. The coin certainly has pedigree: Although the U.S. Mint replaced the Liberty nickel with an Indian Buffalo nickel in 1913, a rogue Mint employee made five of the Liberty coins. Those five are now highly sought after. The one Garrett snagged had been owned by noted collector George O. Walton of North Carolina. After Walton died some 50 years ago—in a car crash en route to a coin exhibition—an auction house mistakenly told his family the coin was a counterfeit. The nickel remained stashed in his sister’s closet for most of the intervening years. When the family eventually took it out to show to experts, it was authenticated and put on the block.

For Garrett, 55, buying a piece of it was the culmination of a lifelong love of coins. In an interview, he described a trip to Washington D.C. when he was a teenager, in which he marvelled over the Smithsonian’s Lilly collection. In 1968, Josiah Lilly donated over 6,150 coins, including an almost complete collection of U.S. gold coins. “When I went in there it totally set me off,” Garrett say, “It was just a room full of gold.” Since then, Garrett has made U.S. gold coins his specialty.

People, Garrett says, “are generally fascinated with money.” And since the financial crisis of 2008, fascination has, for many, become an obsession. Chalk it up to the world’s new ardour for gold. When the dollar fell out of favour a few years ago, goldbugs flocked in droves to precious metals. Even though gold has fallen to about $1,300 per troy ounce from a peak of $1,800 late last year, there is still serious support for investing in rare coins.

Rare-coin auction houses, like Stack’s Bowers and Heritage Numismatic Auctions, have clearly benefited from the trend. Stack’s Bowers has seen live auction sales increase more than two-fold, from $55 million in 2010 to $125 million over the past 12-months. Dave Bowers, chairman emeritus at Stack’s Bowers, sees the strong sales as vindication of rare coins as a tangible asset investment post-financial crisis.

Bowers also credits collectors’ growing acceptance of the Internet. Online bidding enables thousands from around the world to compete with live bidders at the push of a button. “We’re the ideal business for the Internet,” Bowers explains.

In some ways, coins are a perfect type of object for collectors. Rare coins are small and can easily be insured and shipped via Brinks or FedEx, with next day shipping. Plus, coins have a standard grading system, certified by companies such as the Numismatic Guaranty Corporation or PCGS, that allows potential buyers an agreed on metric of quality. Storage costs are fairly reasonable, since safety deposit boxes or personal safes are sufficient for even the largest of collections.

Insurance costs are also quite low. Hugh Wood offers bespoke services for collections worth more than a quarter of a million. On a collection of $250,000, the annual cost is about $875, including a discount for being a member of the American Numismatic Association.

But there are also some dangers. Beware of purveyors who suggest you’ll reap big price appreciation based on indexes like the Salomon Brothers Coin Index, published in 1978. The index produced returns of 12% to 25% annually, tracking the appreciation of only 20 very rare coins. Salomon discontinued the index in 1990, following criticisms that the small sample size which were not nearly representative of the overall industry. But, both Bowers and Garrett agree that careful purchasing of particular coins leads to stronger returns.

Bowers, a collector since he was 14, suggests you should start slowly and concentrate on a niche time-period. “The best way to learn about a certain coin’s history is to form a collection,” he explains, “So I might form a collection, of say commemorative half dollars, and then sell it. I’ve done that a number of times.”

Anyone interested in collecting rare coins should consider attending the World’s Fair of Money from August 13-17 in Chicago. General admission is $6, but ANA members get in for free. Furthermore, a special VIP registration, that costs just $250 per person, allows a collector access to the convention two hours before the doors open. Here, collectors have first pick with floor collections and, after some careful due diligence, an insider’s access to the upside.

This Barron’s article is reproduced with permission.

Cliona O’Dowd

Australian collapse an unwelcome jolt

Coin collecting may be thriving in the US, but in Australia the recent collapse of coin dealer the Rare Coin Company has tarnished the market and injected a sense of fear among investors.

Old money has always had a certain appeal and in the US and Europe, and it’s become big business. Collectors in the US are content to splash out hefty sums for rare old coins like a 1913 Liberty Head nickel. Back at home, the coin market is going through its own readjustment that promises to be a lot more painful.

The collapse last month of the Rare Coin Company was an unwelcome jolt for the market. Estimates put the company’s stock of coins and notes at about $200 million, not exactly chump change. From media reports, it appears many were small investors using their retirement savings on the promise of a safe, reliable investment that offered average annual returns of up to 16%.

The fear is that the Rare Coin Company is headed for a distressed sale, which would likely see investors lose a hefty chunk of their money if the stock is sold at a considerable discount.

Jim Noble, managing director of auction house Noble Numismatics, says part of the problem for the Rare Coin Company looks to have been that it was relying on new buyers entering the market.

“It was good while there were new buyers, but to sustain that just wasn’t possible in the current economic environment.”

Post-GFC, investors worldwide have spent the last few years looking for any place to park their money that promises a decent return. In the US and Europe, the coin market is stronger than ever.

The appeal of coins is that like gold, they are valuable, easy to store and are seen as a safe investment. This is part of the problem. The vast array of old coins out there – some valuable, some not so valuable – means that it’s easy to get caught up in the hype without fully understanding the product. The deceptive illusion is that old coins are easy to understand and thus easy to make money off.

In Australia new investors entering the market and buying old coins for their superannuation portfolio saw prices pushed too high, too fast, Noble says. The result is that people are now coming to realise they bought items that may not be worth what they paid for them.

It certainly doesn’t appear to be a seller’s market. Indeed, discrepancies between price estimates for coins and the realised price at auction are significant. There is about a 30% difference on the downside between the prices some dealers recommend and what’s actually being realised at auctions, Noble says. 

This will not be the news that investors in the Rare Coin Company will want to hear, but potential buyers will be very interested to see how it all plays out.

The impact on the wider market is as yet unknown, although Noble Numismatics’ upcoming auction next week in Melbourne should test the waters.

At least one industry expert isn’t expecting a major fallout across the market.

“I don’t think it would be correct to say there will be a broad impact across the entire market,” says Andrew Crellin, president of the Australasian Numismatic Dealers Association.

“Some people will be affected more than others but there are some areas of the market that are still very strong that the Rare Coin Company didn’t have any position in,” he says.

Nonetheless, the collapse of the Rare Coin Company is a lesson that prospective coin investors would do well to heed. The market is underpinned by genuine collector interest. As Noble says, anyone who tries to invest by just spending money will likely get hurt. It’s collectors that drive this market, not investors.

Noble’s advice is to do some research, talk to a reputable dealer, get the right information, check previous records and gradings and then make an informed decision.

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