Weighing the Risks and Benefits of a Coin: Jeff Garrett

By Jeff Garrett for Numismatic Guaranty Company (NGC) ……
 

The stock market’s sudden plunge in the last few days has certainly brought into focus the issue of risk management for anyone with a significant portfolio of equities. For quite some time, the stock market only seemed to head in one direction, and the all-in strategy seemed like the best option. Since last week, the stock market has given back most of the gains accrued since the election, with many tech stocks suffering the worst. The markets hate uncertainty, and there seems to be plenty of that these days.

Risk management and asset allocation are not just buzz words for Wall Street hedge funds. The terms also apply to anyone making an investment in numismatics. Most collectors and dealers have finite resources for allocating how much they spend on coins. For years, I have recommended that collectors buy coins over time so they can cost average and learn more about numismatics in the process.

For coin collectors, the subject of risk management has a lot to do with what and how they collect. One hot topic, recently, has been the rapid rise in bullion prices. For anyone collecting Double Eagles, for example, the starting price is now north of $3,000 each.

To minimize the risk of prices dropping, you could buy coins a bit more slowly for your collection. Any drop in bullion prices could be considered a buying opportunity. The same can be stated for almost any series where the price is closely tied to bullion prices. American Silver Eagles would be another prime example.

In the last few years, the numismatic headlines have been saturated with reports of “trophy coins” selling for record prices. Many of the stunning prices were the result of just two buyers battling it out to own the coin. Obviously, this is a risky practice when allocating your numismatic budget. For some ultra-wealthy collectors, this does not matter, but we have seen cases of more pedestrian coins bringing somewhat illogical prices after auction battles.

Sometimes opportunity knocks in numismatics, and you need to be prepared to allocate your numismatic budget. In the last several years, there have been too many major collections of colonial coins that have come on the market. Many of the most important coins of the series have dropped in price, as these coins continue to make their way through the auction process. The Richard August Collection will start to be sold in the next few months; this could be a great opportunity for allocating your numismatic funds.

Top-pop coins are another segment of the market filled with risk. The prices these coins bring are closely tied to what buyers are willing to pay to assemble the top Registry Sets. The financial risk of building the finest-known set of anything is much greater than spending the same amount of money on another series in more modest grades. Registry Set collecting can be lots of fun, but when it’s time to sell, you will need at least a few major buyers to support the price of coins you may have gotten carried away with. It is all about risk management.

Coin dealers also must carefully consider risk management and asset allocation when running their business. Unlike a few of the mega operations in the business, most professional coin dealers have limited funding. Allocating limited funds when operating a rare coin business can be very challenging. It is especially difficult given the current high prices for bullion gold.

A small stack of gold coins can cost $50,000 or more. Dealers must also sell the coin before a quick drop in gold prices erases any potential profit. Also, it can sometimes take a week or more to get paid.

For rare coins, dealers are constantly trying to figure out the best use of their capital when building inventory. If you specialize in a series, you may stock coins for longer periods in hopes of finding a retail collector. Wholesale dealers try to find coins that will move quickly, but with lower margins. The real trick is to stock coins that retail buyers want in the long run. This applies to wholesale and retail dealers.

One of the most important pieces of advice that I give young dealers is to not buy coins based on price. Buying a coin just because it is well below catalog or Greysheet value is a terrible allocation of limited funds.

Ugly coins can be purchased at great prices but are hard to sell wholesale or retail. I have seen many new to the rare coin business tie up their money in coins that are illiquid and unattractive. They usually must sell these coins for even less than they paid to free up capital.

Anyone buying coins today has many more tools to make informed decisions to assess risk on the coins they are considering. NGC offers considerable content that can be easily used when buying coins. The NGC Census is a great tool for establishing relative rarity and the NGC auction records information is important, as well.

Most of the major auction houses have sophisticated search tools for checking auction records. There are also a multitude of price guides, as well. Modern coin collectors probably do not realize how much easier it is to make informed purchase decisions compared to a few decades ago.

Collecting rare coins is a fun and educational endeavor but usually requires an investment that most people take seriously. When making your next purchase, think about whether it is the best allocation of your collecting budget and analyze the risks.

Also, be sure to consult with experts in the series you collect. In the long run, carefully considering all of the above should pay dividends when it’s time to sell.

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