Coin Image for Key to Ticker Symbols
Will Rare Coins Fare If Stocks Implode?
( April, 2000 )
in 1999 I posed a similar question and although there is no
guarantee that my forecasts will prove 100% accurate, the economic
and financial market developments over the last several months are
painting a clearer picture of the possibilities. We truly
live in historic times. Although many vested interests on
Wall Street will argue otherwise, U.S. stocks have never been more
overvalued or so critical to the retirement plans of
Americans. The recent volatility in the stock market is
classic late-stage behavior for a bull market, and the record
one-week decline in the NASDAQ market is just one indication that
the speculative nature of trading stocks has reached a level that
could cause serious damage to both unwary investors and the U.S.
economy. I think most investors have to agree that the daily
price swings, both up and down, are unsettling, and the old saying goes, "If you can't take the heat, then get out of
the kitchen!" Unfortunately, many investors will stay
at the party too long, and the financial hangover is likely to be
both severe and prolonged.
I'm forecasting a Wealth Effect in
Reverse, where many investors
feel poorer due to a decline in their financial portfolios, how
could the U.S. rare coin market fare any better?
Historically, the rare coin market has performed best in periods
of strong economic growth when liquidity was ample (both
availability and cost of money) and consumer confidence was
high. This was certainly the case in the 1980's, and
particularly in the late 1980's. So at the risk of
over-simplifying the equation, I am going to list the key
ingredients to the health of the U.S. rare coin market as economic
stability, liquidity, and confidence.
the premise I am going to make is that two out of three of these
factors will not be in the direction that has historically been
favorable for rare coins, yet the numismatic market will enter one
of its strongest periods ever. What collectors and
investors have to realize is that we are in one of the most
unusual and unfortunately strained periods in global financial
history. If you don't embrace this conclusion
currently, I am sure with time and hindsight that you will.
me try to convince you first of the two factors that I see turning
negative in the months and quarters ahead that will perversely
turn investors toward alternative investments such as U.S. rare
is about to become unstable as we enter a marked slowdown in the
U.S. economy due to the inevitable bear market in stocks that we
have probably already entered, the Federal Reserve's continuing
efforts to slow a red-hot economy with monetary restrain (i.e.,
higher interest rates), and a basically over-leveraged consumer,
corporate sector, and don't forget the Federal Government.
There was no true surplus last fiscal year since the National Debt
grew by $90 Billion any way you slice it. So here comes the
dreaded "R" word as in recession, and this could be
severe depending on the degree to which the stock market bubble
implodes. But once enough Americans have a strong taste of
what a true bear market is like, and they feel the betrayal of the
sheep having been led to the slaughter by Wall Street &
Company, the word "stock" (except for soup stock) will
carry negative connotations for the majority. Many
retirement plans will be turned upside down. This is not
folklore I am forecasting, but a repeat of history for a species
that has not evolved past the emotions of fear and greed. So
in a sense, and I hope the reasoning is not convoluted, the lack
of stability will turn investors toward an asset class that has
historically, even with its own severe bear markets, proven a
store of wealth century after century and appreciated well beyond
the rate of inflation.
environment that I see unfolding, of course, also embodies a
reduction in confidence
to the viability of financial assets to protect wealth, and this
area encompasses not only the equity market, but also the currency
market with the U.S. Dollar. No nation can rely
indefinitely on foreign investors to finance current consumption
and investment with record Trade Deficits without an adjustment or
devaluation eventually being forced upon it. When
consumers and investors are virtually on a high from the heady
equity gains of the last 5 years that are unprecedented in U.S.
investing history, it will take a severe decline over a protracted
period to wean them from their current addiction to stocks.
And I can see a major bear market unfolding that wipes out over
40% of the wealth of Americans' equity balance sheets over a
period exceeding 5 years. However, this gradual loss of
confidence in the viability of paper assets such as stocks and the
Dollar to retain their value, as a minimum expectation, will force
investors back into C.D.'s, money markets, and assets that
benefit from either an increase in inflation or a loss of
confidence in financial assets. I am convinced that U.S.
rare coins will benefit from this shift in investor sentiment and
preferences. To assume that many rare coins are too
expensive to attract the average investor ignores the selective
bull market that has been underway since late 1997 in the most
expensive sector of the market, key-date and ultra-rarities.
I can only assume that some of this money is coming from astute,
seasoned, and well-heeled investors that have been careful
students of investing history, and would rather diversify their
investments before the tide turns. Furthermore, savvy
investors know a bargain with many rare coins still 60% below
their 1989 all-time highs.
brings me to the third ingredient, liquidity,
that will be in ample supply because we have a Federal Reserve
that fully understands the prior mistakes made during periods of
U.S. financial distress. Although the Fed will continue to
tighten credit until there are visible signs of an economic
slowdown, eventually the Fed will have to abandon its traditional
fight against inflation and flood the economy again with cheap
money. However, I think it will be pushing on a string at
that point due to the loss of confidence and the debt burdens
existing that need negative interest rates to be amortized.
We all must remember that the U.S. rare coin market is not much
greater than $3.5 Billion in capitalization or total value, so it
will not take much diversion of investment funds from current
income and/or stock liquidation proceeds to create a major bull
market. If $2 Trillion of stock market wealth can be
destroyed in one week, just think what a diversion of just a
fraction of one percent from a $7 Trillion equity market and $9
Trillion economy can do for numismatic prices. One-tenth of
one percent equates to around $80 Billion. If this sum is
even on the high side, one can see the potential for 3-fold to
5-fold increases in numismatic prices.
the bottom line is ....... A major bear market in U.S. stocks
based upon the current strained situation of the global financial
system and markets has a better than 50% probability of creating a
major bull market in U.S. rare coins. This must truly be a