A Companion to Rare Coin Collecting
By Ray Wyman, Jr.
The coin market is a fairly free from government regulation or oversight. With the exception of tax laws and certain regulations placed on dealers, coin collectors and investors are pretty much left to themselves. This has helped encourage the competitive nature of the coin industry and is likely the reason why there is no single coin brokerage that possesses a dominant market share. Additionally, no individual collector has the resources necessary to purchase a significant quantity of available coins to effect value either. Therefore, the structure of the coin market could be seen as an almost textbook example of a pure supply/demand marketplace.
As one might guess, the supply side of rare coin collecting is quite simple. Rare coins are, by their very nature, rare because no other coins are either being produced or ever will be. The supply is therefore limited to what was produced. The original mintage then serves as the base for supply, and reductions in the market come about only in one of several ways:
- Coins can be placed into circulation. Since we are concerned principally with mint state or uncirculated coins, the entry of a coin into the channels of commerce effectively removes it from the supply.
- Coins can be melted by the public or private sector to reclaim their precious metal content. This practice has been extensive over the years, and its full impact has yet to be felt. Over one-half of the Morgan Silver Dollars were melted as a result of the Pittman Act of 1918. During the early 1930s, the government recalled and melted substantial quantities of U.S. gold coins. Some studies indicate that over 90% of the original mintage of some issues have already been melted.
- Coins can be lost or damaged by collectors. Robbery, fires, floods, improper storage and careless handling all claim a share of the remaining population. While the actual number of losses per year is relatively small, the accumulated losses over several decades do impact the supply.
- Coins can be placed in museums, or impounded permanently in private collections.
Demand can have a dramatic effect on value. The acquisition of material wealth is one of man's oldest pursuits, and this tendency is deeply rooted in coin collecting. Natural human curiosity leads to the accumulation and study of items from the environment, whether man-made or not. Be it unusually shaped rocks or interesting seashells, the desire to preserve, study and classify related items was present from the dawn of civilization, and can almost surely be regarded as an innate behavior.
The collecting of old and rare coins dates back well over two thousand years and, while once the province of emperors and kings, has filtered down to virtually all levels of society and is today regarded as the most popular hobby in the world.
In 1933, gold was demonetized and silver followed suit in 1968. In each case, the price of these precious metals quickly rose above their "face" exchange rate. Until these dates, the only reason that a rare or old coin was worth more than its face value was the existence of someone who would pay a premium simply for the privilege of becoming the new owner of the coin. Because these people were sufficiently numerous and ardent in their pursuit, coins which were collector's items seldom remained in circulation for any length of time. This created a premium market for the acquisition of rare coins.
This premium market has a three tiered demand behind it. The first, and most obvious, is the "face value" demand, which is simply a desire by virtually all people to have more money. The face value is constant, and a silver dollar minted in 1795 could still be spent today for goods and services costing one dollar. The second level of demand comes from the price of precious metals, which places a small intrinsic premium on older U.S. coins. This typically ranges from about five to twenty times their face value, depending upon whether the coin is made from silver or gold. This value fluctuates directly with metals' prices, but is usually an insignificant portion of the total value of any given rare coin. The third layer of demand can be called the collector premium, or the amount over the intrinsic metallic value an individual is willing to pay purely for the psychological satisfaction and pride of ownership. Due to the ever increasing number of collectors, this value enjoys an almost constant rate of steady growth.
Beginning in the 1960s, a new facet entered the demand equation. This fourth layer of demand could be called the investment or "future" value. The inexorable laws of nature, when applied to obsolete collectible items of any kind dictate a falling supply and increasing demand. Microeconomics teaches that these two ingredients result in upward pressure on the prices for the items in question. Since a basic long-term collector trend has long been established, those wishing to "invest" in this trend have further stimulated demand. In other words, the coin itself has not been bought, as much as a future "IOU" from a collector. Funds from this demand sector tend to be greater in amount and tend to be more transient than from the collector group. This leads to a cyclical price pattern, reflecting the rising and falling expectations for future performance.
Using the basic supply and demand characteristics of coin collecting and overlaying them with the grading concepts discussed earlier, and the pricing model for coins becomes a bit clearer. It is human nature to want the best and, if given the choice between two otherwise identical coins, the one in superior condition will undoubtedly be preferred. Since the supply of these top grade pieces only gets smaller, the demand increases and so does value.
It should be noted, however, that demand is not inelastic. While collectors prefer top-grade material to lower grades of the same type, it is unquestionably price sensitive. For example: few would argue that given a choice of two coins of the same date, mint and type, at an identical price, the superior coin would be preferred. However, given a choice of an MS-63 example at $100 or an MS-65 at $500, the choice becomes more difficult. To assert that all collectors will demand only the highest graded material, regardless of price, can be a costly assumption.