RARE COIN MARKET UPDATE
(September, 1999)

I know that I' m a little late in getting this update onto the web, but some very powerful developments have occurred in the gold bullion market that change my topics of discussion.  Any active gold coin investor, even in the gem uncirculated category of MS65, has seen prices at the CDN dealer bid level soften in 1999 anywhere from 5% to 30% year-to-date.  Since one of the points that I wanted to make this month pertained to parallels between stock investing and coin investing, I want to remind investors that buying a fundamentally sound area of any asset market that is temporarily depressed usually turns out to be highly productive over the long term.  And as you have discerned from my prior communications, I am not an advocate of buying common date or generic gold coins (or silver) under most circumstances, since rare coin investing entails the operative word 'rare' , and buying semi-rare coins in the generic category to attempt to benefit from a rally in gold bullion is a flawed strategy from the outset.  Why pay any scarcity premium of from 10% to 20% for common date 'rare' coins or generic (high survival population) gold coins when you can pay just 3% to 6% premiums over spot gold for true bullion coins such as the American Gold Eagle and the Canadian Maple Leaf?!  I won't get into a discussion of the massive premiums over spot bullion prices for less than one ounce ($50 denomination) American Gold Eagles at this time (this phenomena relates more to skillful marketing than true numismatic standards); but suffice it to say that if you want a bullion hedge, then buy a bullion coin that carries a minimal premium or get caught in the normally unprofitable game of trying to time exit when the premium gets totally absurd.  In summary, don't try to manage bullion price risk and premium risk at the same time with a gold bullion hedge.

I digressed a little here, but unless you have been orbiting Mars the last 10 days, you have noticed  a strong rally in the spot gold price to around $280, a far cry from the multi-decade lows around $255.  Could it be that the Laws of Supply & Demand for gold, after having been temporarily repealed by the financial  or paper derivatives market of gold futures short positions for over 1.5 years now, are finally reasserting their influence on the spot or cash gold market?!  We have a classic short-covering rally underway in the bullion pits today as the central banks of Europe have woken up to the market destabilization caused by perpetual reserve sales and super cheap gold leasing rates.  Even if commodity dumpers such as Russia try to fill the shoes of these previous sellers in an attempt to prevent economic collapse, no sovereign state (except for Great Britain of late) would sell increasing amounts of a public asset into a declining market or take actions that would significantly reduce the value of the asset for sale.  So even the cash-strapped Russians will have to step gingerly through any gold bullion reserve sales in the months ahead to avoid depressing, even momentarily, the price of one of their few remaining liquid assets.  This more psychological than real influence on gold bullion of central bank sales is more of a neutral issue now, and may even reverse to a positive influence of actual purchases if such trading majors as China act upon their reported plans to increase gold bullion as a percent of total reserves.  In a rapidly rising market, they will be forced to buy sooner rather than later due to the multi-million dollar (yuan) cost of waiting.

To put today's U.S. rare coin market back into perspective vis a vis the stock market, as the equity market indices have been propelled relentlessly higher by the highest capitalization stocks, a similar concentration of dollars is chasing the key date and ultra rare coins at present.  When a world record price is paid for a single coin, $4.14 Million for the 1804 Draped Bust Silver Dollar, then this example and many more of ultra-rare coins experiencing the majority of price movement in the rare coin market today points to the generals leading without the troops participating.  Furthermore, and a more detailed analysis of current premiums being paid by buyers in the frenzy of quasi-hyped coin auctions will follow in later Updates, I would venture to say that it will be many a moon before many of these well-heeled buyers will be in a position to make a decent return on their not-insignificant investments.  A reference book written by David Hall, "A Mercenary's Guide to the Rare Coin Market" (1987) clearly advised rare coin collectors from concentrating in coins valued over $25,000 to $30,000 each.  Only an emotional factor devoid of any relationship to relative scarcity can justify the massive premiums paid by collectors/investors for these ultra rarities today.  Talk about cheap cash burning a hole in consumers pockets!  Now, I have not adjusted the coin market today for numismatic inflation (which has been net deflation since 1989), but I would recommend adhering to this guideline for the non-internet moguls among you.

Although PCGS and NGC population reports are sadly compromised by constant resubmissions by want-to-be crack-out artists, one would generally not go too far afield by concentrating one's purchases in rare U.S. silver and gold coins with combined populations less than 70 and greater than 15.  There is undoubtedly scarcity in U.S. rare coins meeting this very rudimentary screen due to the potential for 20% to 30% double counting, but use population criteria as just one of many in making a worthy rare coin selection.