A Companion to Rare Coin Collecting
By Ray Wyman, Jr.
Holding Rare Coins
Once you have acquired your coins, a holding period of five years or longer is recommended (some experts say ten years is the minimum). During this time, it is possible to track the progress of your purchase by staying in touch with the rare coin market. But, an understanding of how the market is reported, and the real meaning of the available statistics and prices, is essential if you plan to stay involved and gain a working knowledge of the market.
During the first half of the century, the value of coins was determined by both public auctions and the annual fixed price lists of the leading dealers of the day. B. Max Mehl's Star Coin Encyclopedia, listed his selling prices for the entire series of U.S. coins and served as a reference work during the 1920s and '30s. By the late 1940s, several independent publishers and issued "official price guides" for U.S. coins. Most successful was Whitman's A Guide Book of United States Coins, or "The Red Book."
By the 1960s, the market was exhibiting price moves on a weekly basis and active wholesale trading had necessitated a newsletter to monitor this activity. For the past 25 years, the price reporting mechanisms of choice in the numismatic marketplace has been The Coin Dealer Newsletter (P.O. Box 11099, Torrance, CA 90510). Begun in 1963 as a weekly teletype report of price trends in the then fast moving BU roll market, it has evolved as the unchallenged pricing authority for the entire numismatic market.
As a reporting agent, The Coin Dealer Newsletter for years faithfully monitored activity on the teletype circuit, reporting the highest offers, or bids, for a particular coin or series. However, the teletype did not report the success or failure of the bid, the number of coins purchased, if any, or more importantly, the number of coins rejected. The dealer making the bid could declare any coin sent to him for purchase to be of an inferior grade, thereby invalidating the offer. As the judge and jury of material submitted for purchase, the bidding dealer could, in essence, set the grading standard wherever he wished. This fact, more than any other, must be considered particularly when tracking price levels over extended time periods.
The rapid market expansion of the late 1970s saw the circulation of the "Greysheet" spread from exclusively dealers to large number of collectors and investors, thereby changing the complexion of the listed prices. These new classes of buyers represented a significant portion of the available funds flowing into the market and, armed with the "insider knowledge" contained in the Greysheet, became reluctant to pay much over wholesale "bid" to obtain items of interest. Consequently, trading among professionals was forced down to levels below those listed in the sheet in order to maintain the margins necessary to continue in business. Due to this change of meaning behind "bid" levels, rates of appreciation typically found in numismatic studies or investment comparison charts tend to overstate the case for coins by incorporating this wholesale to retail drift into the statistics.
Finally, remember that the bid and ask levels published in the "Greysheet" represent the highest price that a particular dealer will pay for an item, provided that he still needs it, and that it will pass his personal criteria for qualifying at the listed grade. These levels should not be taken as guaranteed liquid values that apply uniformly across the market.
It's important to grasp the interplay between the marketplace and grading since, in reality, the grade is more of a function of value than vice versa. The real meaning of this concept is that coin values fluctuate more than one might suspect from tracking pricing guides, and the risk/return tradeoff is greater than published statistics indicate. Contrast this with the Certified Coin Dealer Newsletter, which is far less subject to manipulation. Prices reported are, consequently, far more volatile, exhibiting changes on a week-to-week basis.
In the past few years, several dealers have brought out pricing newsletters similar to the Coin Dealer Newsletter, which list their own bid and ask prices for selected coins. Two caveats should be noted:
- Read the fine print which accompany these sheets. Make certain that their "bid" price represents an actual offer to buy. The price will still be contingent upon their acceptance of the grade, as offered to them.
- The reliability and strength of those pricing guides cannot exceed that of the issuing dealer. These guides represent a very limited market, which is subject to evaporation virtually overnight if unfavorable circumstances suddenly arise. This would be especially costly if the price spreads are unrealistically high initially.
Other pricing guides published in major numismatic newspapers or periodicals (e.g., Coin World's Trends, Numismatic News' Coin Market, Coin Prices Magazine) serve as good retail pricing lists for many local shops or small dealers. They have gained little use in the investment arena today, and are unlikely to do so in the future. The venerable "Red Book" is also not a useful pricing mechanism in today's fast changing market. Its longevity does, however, make it a useful source of pricing history in the 1950 to 1970 period.
A final source for coin prices can be found in auction records, summarized in Krause's Auction Prices Realized. Variations in grading between auction companies often present wide price ranges, making precise analysis of the more common coins confusing. Auction results are most useful for great rarities (coins over $10,000), since their trading on the open market is infrequent, and they are often not listed in other pricing guides. Remember that whatever pricing sources you use or subscribe to, they are only guides. There is no substitute for interacting in the real market, and talking to dealers.
Most experts advise that numismatic purchases be held for at least five to seven years, and preferably ten years or more. Like most tangible commodities, the prices for rare coins are cyclical. While the long-term trend may seem generally upward now, it doesn't mean that prices won't decline later. Price movements arise from a multitude of factors, both internal and external to the coin market. Internally, promotional efforts, discovery and dispersal of large accumulations, and speculation all play a part in the fundamental supply/demand equation for coins. Externally, the price of precious metals, the rate of inflation and interest rates all impact the components of the pricing formula. More importantly, the anticipation of movements in these measures must be considered, since the psychology of the market is often the reality.
Another reason behind the long-term nature of rare coin investment concerns the spread between wholesale and retail. Contrary to what you may read, or are told, unless you are a recognized dealer in rare coins, you will be buying coins at retail. Despite the fact that you may be paying "wholesale bid" according to your dealer, you can be sure that the wholesale value of that coin is far enough below your retail price to allow for a fair profit. But how much is fair?
As we have discussed earlier, rare coins are not a financial product in the sense of stocks, bonds or other securities. Those who deal in coins are not brokers. Dealers buy the coins, stock them and resell them. Consequently, the buying and selling of rare coins is really a more traditional wholesale/retail relationship than that of a commission broker.
Due to the cost of maintaining an inventory, and the expenses of travel, advertising and insurance, the final after-tax earnings of most dealers is a very small percentage of their total sales, usually around 5%. The profit margin on the initial sale must be sufficient to cover these expenses, and the belief that these expenses can be met with gross margins in the 10%-15% range is naive. Actual profit margins (based on cost) in the rare coin industry vary widely, and are not especially useful in measuring the value received from a particular source.
Since the determination of the value of a coin is subjective to some extent, trading among wholesalers is extensive. Thus, the "cost of goods sold" to a dealer for a specific, individual coin could vary tremendously, depending on where in the wholesale chain he or she acquired it.
Considerably more relevant is the margin between a given dealer's retail and the wholesale selling price. This measure is typically in the range of 20% to 40%, depending upon quality, price range and liquidity of the item in question. In addition, the dealer's position in the wholesale chain is a factor. Those at the sources enjoy a considerably greater margin than "end-market" dealers.
Remember that good or poor values can be obtained from any size or type of dealer. Expect the top wholesale value of the coins you buy from a reputable dealer to be approximately 60% to 80% of the price you pay. Again, the mark-up over actual cost may very well exceed that amount, particularly for those dealers close to the sources. This measure is apt to vary widely from coin to coin, making precise statements difficult, but this is the margin which dealers must achieve to remain solvent and financially stable.
Storage and Preservation
Since most profits in rare coins are made by holding them for at least a five-year period, a few words about storage and preservation are in order. Due to their portability, coins are easily stolen, so if you wish to keep your coins at home, a strong, fireproof safe is a wise investment. Most investors choose to keep their coins in a safe deposit box at a bank, and this generally offers the best protection against loss or damage. Insurance for items held in safety deposit boxes is inexpensive, and well worth the peace of mind. Photographs of the coins in your portfolio may be kept at home, since much of the enjoyment of owning tangibles comes from being able to appreciate their beauty.
To preserve their condition, coins must be stored in chemically inert holders, which contain no substances that may interact with the coin's metallic content. Fortunately, this problem has long been recognized, and there are an abundance of safe holders available on the market today. These include rigid three-part plastic holders assembled with screws, small circular two-part plastic cases that fit tightly over the coin and brittle flips made of mylar.
The problem is that none of the good, long-term holders are practical for short-term use by wholesalers, who trade coins often and must remove them for inspection. For these purposes, soft, flexible flips containing polyvinylchloride (PVC) are often used, since they facilitate frequent handling. While PVC flips are safe for a few months of storage, they should be avoided for longer periods, particularly for copper and nickel. Your dealer can recommend or supply suitable containers.
Appraisals and Evaluations
Finally, during the term of your holding period, you may wish to seek an appraisal or evaluation of your coins. Usually, your dealer is your best source for a reliable quote. Third party dealers have a strong tendency to undervalue material (grade lower) which they did not originally sell, in the hope that they can either purchase it cheaply, or obtain your future business. This bias is particularly evident with local coin shops, or smaller dealers who lack extensive experience with high quality coins.
It is simply human nature for the prejudice of ownership to subconsciously influence judgments, and this should be remembered when seeking any independent opinion of the value of your coins.