Coin investment: making money from money

Conventionally, an investment involves handing over money in exchange for shares, real estate or material goods. Imagine paying serious money for some serious money.
Mary Nguyen investigates.

In 2002 the 1933 Double Eagle coin, the Holy Grail of coins, was sold at Sotheby’s in New York for a cool US$7.6 million (AU$15 million).  Such an amazing purchase only fuels the widespread curiosity of numismatics – collectors of coins for pleasure or profit.  

However, before you start diving for sunken treasure in pursuit of rare coins, consider that not every coin is as valuable as the Double Eagle and that the coin’s rarity is only one consideration. Putting your money into money is potentially very lucrative, with the seemingly simple strategy of selectively buying rare coins and then selling them when their value increases. Yet, like other commodities, the coin market is subject to similar market pressures of supply and demand.   

Steady as she goes

Over the past few decades there has been steady growth in prominent areas of the coin market. It used to be that the professional collectors and dealers were the ones to set prices and trends. Nowadays, the Internet enables wide dispersion of numismatic information and facilitates efficient transactions for discerning enthusiasts and investors alike.   

Entry into the market is accessible and affordable as some top quality coins can be bought for as little as $100 and no taxes are payable until the coin is sold.  

Investors should be aware, though, that coins do not normally provide the same type of return as an investment in stocks, nor can they appreciate as quickly. In an era of instant gratification, coin collecting can be frustrating as good collections are built over a number of years. However, when the time does come to sell your coins, you can expect and receive immediate payment.

There is an increasingly obscure difference between collecting and investing in coins.  Those who start out with the view of making a quick buck are likely to fall hard and fast. As will those who approach numismatics with a dispassionate attitude. Building up an impressive collection is a long-term project and requires much time and perseverance. Pure collectors buy coins because they love them and because they have carefully researched them and often make money in spite of themselves. This goes to show, that like any good investment, there is a balance between passion and profit.

What is fair?

The secret of successful coin investment is the ability to pay a fair price for a good quality coin and then knowing when to sell it. The basic expert rule that should be adhered to whether you’re a beginner or seasoned collector is ‘buy the best and forget the rest’. It is logical to ensure that your money should be used to purchase quality over quantity. High quality coins are always in the greatest demand and will become harder to find over time. Thus the price of these will increase more rapidly. Further, purchasing quality coins helps insulate you from the periodic movements in the broader market.

In determining the value of the coins, potential buyers must know that coins are graded according to their appearance. Generally, there are two categories, namely uncirculated (mint state) and circulated coins, and within those categories are further gradings that indicate the wear of the coin. The grades are influenced by factors including lustre, contact marks made when the coins are minted, quality of those marks and overall aesthetic appeal.

In addition to the grade, the demand for the coin will also affect its value. Collectors and investors also compete with purchases of coins being made for museums and other permanent collections. As the market shrinks, the coin’s rarity significantly affects its value.  

As with other types of investments, there are a few risks you need to be aware of. A less frequent but still significant risk is counterfeit coins. These are coins that have been forged or altered to appear more valuable than they actually are. A more common risk is buying an overgraded coin: a coin that is graded to be in better condition than it actually is. The only way to alleviate these risks is to be familiar with the grading scales. As this takes much time and skill, the next best choice is to work with a trustworthy and thoroughly knowledgeable dealer.  

Before selling your coins you should also be wary of any costs associated with engaging a dealer. Commission to sell coins may be higher than for other investments, thus eating into the seller’s profit margin more so than stock or mutual fund commission.  

If you’re thinking about starting your very own collection the best way to downsize your risk is to learn as much as you can about the coins and the dynamics of the market. Read books and catalogues, attend coin shows, and coin auctions. Doing so enables the buyer to make informed comparisons and quality purchases. As there are so many options, literally a whole world of coins for the prospective buyer to choose from, the person with the most knowledge wins.

The risks