Numismatics: Is it for you?

Broadly speaking, numismatics is the study and collection money, coins and medals. For our particular purposes today, we're going to focus on the area of old and rare coins. Coin collecting has evolved well beyond the simple accumulation of old and interesting currency. It has, in fact, become a quite sophisticated investment vehicle and hedge instrument that incorporates high-volume purchases and sales, independent third-party grading, widely circulated and updated pricing sheets, electronic trading, and a large and growing number of enthusiastic participants. Numismatics has become a popular pursuit among well-to-do investors, similar to collecting fine oil paintings, antiques and gemstones. It's not at all unusual for an individual rare coin to sell for a seven-figure amount; however, the vast majority of items in this market can be obtained at generally affordable prices for many investors, and as such that area receives the most market activity.

Be no means is numismatics is for every investor. Although strong coin markets can be wildly lucrative, weak markets can conversely be just as devastating. Further, it's generally not a very good idea to purchase truly rare coins as an ultimate hedge against economic disaster for the simple reason that they might be difficult to liquidate under actual emergency circumstances. However, as a capital gains instrument, such coins can be a very rewarding investment. If you're looking to protect your financial well-being against possible future financial calamities, it's advisable to first build a foundation of gold bullion coins, such as pre-1933 European and U.S. gold coins. Once this has been successfully accomplished, adding rare coins to your portfolio as a growth vehicle may be reasonably considered. Rare coins have historically been a part of major precious metals rallies, especially if those rallies were brought on as a result of inflation. For example, during the 1920s when hyperinflation destroyed the German mark, a substantial amount of assets were saved (not to mention considerable profits earned) by investments in numismatics.

If you're aware of and can live with the volatile nature of the numismatic market as not only a detriment but also as a valuable attribute, then you could possibly have the temperament to successfully invest in rare coins. But don't go it alone, especially if you're a novice in the market. Be sure to find an experienced adviser to help guide you. Furthermore, rare coins are generally considered to be, at minimum, a three-to-five-year investment by all but those with more speculative objectives. The market generally does not move smoothly, being characterized by irregular starts and stops. As a matter of fact, steady appreciation in the numismatics market can often be about as rare as the coins themselves. On the other hand, in the long run, coins typically have maintained a very solid track record and have historically performed in much the same manner as the stock market. Therefore, if you begin with the attitude that you're investing for the long term, your odds of being successful will usually be much greater. But, needless to say, as with any other type of investment, there are risks, and there are no guarantees.

The rare coin market consists of different sectors, much like the stock market. There are nineteenth-century coins, twentieth-century coins, commemorative coins, silver dollars, small-denomination gold coins, and the list goes on. Unlike the stock market, however, a coin sector can sit dormant for years without moving in either direction. But once it does begin to move, the activity can come very quickly. It's not unheard of for a sector to suddenly double in value within a single year (or fall just as rapidly) and then become dormant again. Again, if you're of the mindset that you're investing for at least a three-to-five-year term, you stand a good chance of being in the market when such spikes occur and profiting by them. Patience and resolve are invaluable traits when investing in numismatics.

Two factors must be given major consideration when dealing with any numismatic investment: grade and population. Grade refers to a coin's quality. The grading system for uncirculated coins (those that exhibit no wear) runs from MS (mint state) -60 up to MS-70 (a "perfect" coin), with investment-grade items beginning at MS-64. Very few, if any, coins are available with an MS-70 designation. Coins graded below MS-64 generally should not be purchased for investment purposes unless the item has a recognized rare date and mint mark. Many large marketing organizations in the field often peddle low-grade (MS-63 or less) coins as numismatic investments. But experienced professionals typically consider these items as common, and not worthy to be labeled as investments.

When purchasing rare coins, it's very important that they be graded and authenticated by one of the nationally accepted grading services, either the Numismatic Guaranty Corporation (NGC) or the Professional Coin Grading Service (PCGS). The coins should also be housed in hard plastic containers. This not only increases their liquidity but also helps to narrow the spread between their buy and sell prices.

The second factor, population, refers to the total number of coins given a specific grade by the grading services. When buying rare coins, check their population figure, or relative rarity, against other items in the sector or series (the set of years that a coin was minted with a specific design and denomination). Both grading services mentioned above publish population reports that provide this data. When choosing among coins, it's best to go with strong relative rarity (in other words, scarcity). This will typically pay off in the long run by increasing the likelihood that your purchase will benefit if there's a run-up in value for that particular series.

There are a few other advantages of coin investing that should be mentioned. For instance, there are no reporting requirements for the buying or selling coins, so your privacy can be easily maintained. Also, the tax code allows you to trade one numismatic item for another as a like-kind (or 1031) exchange, thus delaying capital gains taxes until you liquidate the investment. This allows you to build strong asset value by trading coins of appreciated sectors for those of other sectors that have remained dormant, with the hope that they will also rise in value. However, as is the case with all tax-related issues, be sure to consult your tax professional to ensure that your trades qualify for such a transaction.

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