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Should Investors Buy Numismatic Coins or Deal with Numismatic Exchanges?
When investors consider investing in numismatic coins versus bullion, it is difficult to choose between the two. When I was first considering whether to invest in numismatics or bullion I went to the Houston Numismatic Exchange and the Houston Gold Exchange, coin shops in my local town and talked to sale associates that claimed that numismatic coins couldn’t be confiscated, didn’t have to be reported, and would outperform bullion. On the other hand bullion companies argued that it is more important to own more physical metal and not simply a rare coin.
Gold Confiscation
So do the numismatic exchanges and companies have a point? The answer is no. The first argument that numismatic exchanges make is almost always that numismatic coins can’t be confiscated. Most numismatic exchanges argue that numismatic coins cannot be confiscated based on Franklin D. Roosevelt’s Executive Order in 1933. So the first thing we have to do is examine the reasons behind this confiscation. Executive Order No. 6102 issued by Franklin Delano Roosevelt outlawed the ownership of gold. After the executive order, the government bought back gold at $20.67 an ounce from the public in accordance with eminent domain law. There are two main reasons. The first reason a government would confiscate gold is in order to gain additional funds in order to deal with fiscally hardship. And the second reason would be in order to inflate the money supply.
Most gold and silver investors believe confiscation is likely because they only are considering the first option. Most investors in gold and silver believe that is why Roosevelt confiscated gold. However, this simply isn’t true. In 1933, the United States was on the gold standard, which meant that every dollar in circulation was backed by physical gold. This meant that FDR could not simply print money in order to finance his massive spending and this is why FDR ended up confiscating gold. He could not inflate the dollar until he controlled the value of the gold. It is important to note here that the US government held 68.2% of the world’s supply of gold at the time. Once Roosevelt made gold ownership illegal, he immediately raised the price of gold to $35 an ounce. This immediately devalued the dollar by 40% over night. This is truly the reason why Franklin Delano Roosevelt confiscated gold. Therefore FDR would not confiscate gold today because the Fed now has the ability to inflate the money supply without controlling the gold supply. Second the Government is also to not likely confiscate gold in order to gain extra funds when they could confiscate the $7.3 Trillion rapped up in retirement accounts today, which they already regulate and control in many ways. All gold and silver holdings are a mere fraction of this and confiscation would require most likely a house-to-house search, which would be moth time and manpower intensive. When we look at confiscation in this light, the numismatic exchanges con simply disappears.
Reporting Gold and Silver
A second misconception is that investors do not have to report numismatic coins, but they do have to report bullion. Neither numismatic coins nor bullion require any reporting when they are bought and it is only when silver is sold back to a dealer in excess of 1000oz or in gold in excess of 25oz at a time that a dealer has to report anything to the government.
Numismatic Coin Performance
Finally, many numismatic exchanges argue that numismatic coins will outperform bullion in the long run. However, when an investor examines all the factors this is quite unlikely. First, if the price of silver or gold goes up will numismatic coins or bullion perform better? Let’s say for example, silver goes up 177% from $18 to $50, then a one-ounce numismatic collectible coin valued at $100 is likely to go up by only 32% to $132. The collectible coin will go up based on the silver it contains, but there’s no reason to think the numismatic premium will increase too. On the other hand the same $100 in bullion is now worth $277, a difference of 145%!
Numismatic coins owe the value above the silver cost exclusively to their rareness and collectability. Historically, during times of economic hardship these types of purchases do very poorly because the demand for them drop and as a result the premium over the price of gold or silver charged goes down. So in some cases it is possible to see the price of silver and gold go up and the value of numismatic gold and silver coins go down!
A salesman might have a chart showing the performance of “rare/collectible/numismatic coins” against “regular/bullion coins.” Of course, the chart shows the numismatics performing much better. But these graphs inevitably track particular rare coins, which are cherry-picked with the benefit of hindsight. For every one rare coin that outperforms, there could be ten to twenty that severely underperform. Only afterward would you know which coin you should have bought. Additionally performance charts often omit the dealer’s high markups and markdowns that would more than wipe out the alleged profits for retail investors. In the end, investing in numismatic coins is far inferior to bullion.
