The US (gold & silver) Coin Market Enters a Major Up Cycle

The US Coin Market Enters a Major Up Cycle, By Barry Stuppler

In 40 years of active participation in the US coin and precious metals markets, I’ve helped my clients make millions of dollars. During that time I’ve learned to recognize early signs of bull and bear markets. The following signals suggest that investment-quality US gold and silver coins are in the early stages of a long-awaited major upswing. These facts should cause coin investors and collectors to consider increasing their holdings of high grade US gold and silver certified coins, particularly when alternatives such as stocks and bonds are trending sideways or down.

11 early signs of a bull market in investment quality US gold and silver coins

1. Interest rates appear to have bottomed out.
2. Major US government budget deficits loom.
3. The threat of more terrorist attacks in the US & ongoing violence in the Middle East & Pakistan that endanger world peace and prosperity.
4. A new generation of investors has learned the hard way that markets, unlike diamonds, are not forever. Stocks are down; gold is up.
5. Silver is poised to surge.
6. Cash is a poor alternative to equities.
7. Investment quality US gold and silver coins offer special benefits.
8. Coins have returned to the American mainstream.
9. Certified grading and professionalism make the new bull market in coins more sustainable.
10. Coin dealers have discovered mass marketing, raising demand.
11. Eye evidence confirms that supply is down, demand is up.

Let’s take each sign and why it (especially when taken together with the others) indicates that we are on the verge of a major upsurge in the price of US gold and silver rare coins. After that, I’ll make some recommendations about which coins to invest in to profit from the new bull market.

1. Interest rates appear to have bottomed out.

From August 24, 1999 to May 19, 2000, the Federal Reserve Board raised its discount rate five times in a row, starting at 4.75% and ending at 6.0%. These successive rate increases helped suppress the “irrational exuberance,” to use Fed Chairman Alan Greenspan’s famous (or infamous) phrase, that inflated the Internet bubble. Many equities investors are still licking their puncture wounds. On January 3, 2001, the Fed reacted to the downturn in the economy by reducing the discount rate from 6.0% to 5.75%. Eleven additional decreases in the next 11 months slashed the rate to 1.25% by Dec. 2001 – a 53-year low.

Since December the Fed has publicly adopted a “neutral stance” on interest rates. Most economists believe that the Fed is “neutral leaning toward up.” They doubt, given mixed economic signs (the “jobless recovery”), that rates will drop further. Interest rate increases – even anticipation of increases – tends to depress stock prices and raise the price of hard assets such as precious metals and rare coins.

2. Major US government budget deficits loom.

Tax cuts ganged up with the economic downturn to decrease federal (and state, county, and city) revenues. Then came the increases in government expenditures related to September 11: billions for bailing out airlines, federalizing airline security, and measures against bio-terrorism. Billions for the war in Afghanistan and payments to Pakistan and other countries to bolster the anti-terrorist coalition. “Faced with a plunge in tax receipts,” reports the Washington Post, “the Bush administration will run out of ways to maneuver around the federal debt ceiling and could default on payments to bondholders on June 28….On that date, the government must make more than $60 billion in semiannual interest payments to trust funds, primarily Social Security.

While that is a paper transaction, consisting of new bonds, it counts against the government’s $5.95 trillion debt limit. Officials said the Treasury plans to start using a variety of budget tricks later this month to keep the government below the debt limit, but that will not be enough to prevent default on June 28 if Congress does not raise the limit.” In Afghanistan, Taliban troops fled from Coalition forces without suffering a decisive defeat. They continue to conduct guerilla operations, taking advantage of ethnic, sectional, and tribal divisions that weaken unified operations against them by the Afghani government. All of this means US funds will go on flowing into Pakistan and others countries to keep them in the anti-terrorist alliance and into military operations and “nation building” in Afghanistan.

There will be more, not less, deficit spending; more, not less, inflationary pressure pushing up the price of hard assets. Estimates for the federal budget deficit for the current fiscal year are in the $100-billion range, and congressional leaders fear that with the continued need for homeland defense and increased military spending it may take five years or more to get back to budget surpluses. Balancing the budget became a national priority because previous bouts of deficit spending contributed to steep inflation that damaged the economy and diminished the value of people’s income and savings. The same will happen during this new period of deficit spending. Many people will protect themselves by investing in hard assets, just as during the inflation of the late 70s and early 80s, when this drove gold up to $850/oz. and silver to over $50/oz.

3. The threat of more terrorist attacks in the US & ongoing violence in the Middle East & Pakistan that endanger world peace and prosperity.

In addition to its direct threat to our lives and our way of life, global terrorism attacks commerce. Nineteen terrorists in four airliners triggered the loss of millions of jobs and cost the world economy trillions of dollars. The US and other industrial nations would like to concentrate their assets and attention on suppressing global terrorism.

The US in particular wants to use its military muscle to install a friendly regime in Iraq (which would require an additional massive outflow of dollars and yet more inflationary pressure). But – along came the second, and much more violent, Intifada and Israel’s armed incursion into the West Bank, which play into al Qaeda’s strategy of destabilizing the governments of Saudi Arabia, Kuwait, and other oil rich Arab states by polarizing popular opinion against their monarchies. Weather it’s the threat of nuclear war between India and Pakistan or Sadam Hussein fanning the flames by donating money to the families of suicide bombers and by his 30-day suspension of the flow of Iraqi oil, reminding the world of the energy crisis and inflation induced by the 1973 reduction of oil exports by OPEC, and the second energy crisis of 1979-80.

Arab rulers are terrified of what may happen to them and their fortunes if armed struggle between Israel and the Palestinians continues. The crown prince of Saudi Arabia visited George Bush in Texas to communicate their desperate need for a solution to the conflict. In return for supporting an invasion of Iraq, they want US military involvement in a Middle East peace settlement. This would require an open-ended US military commitment that would substantially add to deficit spending for years.

Meanwhile, wealthy Arabs and the rich in non-Arab oil-exporting countries are seeking ways to protect their wealth. From Biblical times Muslims, Christians, and Jews alike have agreed on one point: they have looked to gold and other precious metals as a safe store of value. Throughout Asia, this belief in gold is also an enduring tradition. In today’s world, no investment and no nation confers absolute security – who anticipated war would come to the sheep pastures of the Falkland Islands? – but US gold stored in the United States looks like a glowing beacon of security from the trembling thrones of the Middle East.

4. A new generation of investors has learned the hard way that markets, unlike diamonds, are not forever.

Stocks are down; gold is up. The raging equities bull of the 90s became a bear that bit the hands that fed it. Millions of Americans who had confidence in the stock market lost funds they had invested toward retirement and college for their kids. Many lost their life savings. And that was before Enron the magician and magician’s assistant Arthur Anderson dropped the silk handkerchief and revealed overstated earnings and profits and hidden debt. Reliant Resources, another Houston energy firm, now faces an SEC investigation into similar sleight of hand.

Investigations of other public companies are likely to follow. Merrill Lynch has paid a $100-million fine and separated its analysts from its investment banking division after a New York State investigation revealed that analysts touted stocks to the public that they privately slammed. Attorneys general from over 30 states are looking into launching a combined investigation of the other major brokerages, and investors who sustained losses are lining up to sue Merrill and the others. Such repeated battering jarred confidence in the stock market from the heads of investors, making them less receptive to those brokers and analysts who continue to preach that equities are always the best investments, regardless of what’s happening economically and politically.

Where do people look to store value in times of uncertainty? For thousands of years the answer has been gold. Americans, Arabs, Asians, and Europeans are trading dollars for gold. That’s contributing to a weak dollar and a 2-year high in the price of gold. Financial analysts and major investors are discovering gold. Gold stocks and gold and precious metals mutual funds have been the best performing sector since the beginning of the year, with many gold funds and stocks up over 50% while other sectors continue to decline. Even the small cap sector, which was the one bright spot in the market other than precious metals, seems to be succumbing to the general unease about equities. This rally in gold stocks is largely the result of buying by fund managers and large investors.

I believe it is catching the attention of a wider spectrum of investors. They are starting to hear what many investment advisors have been saying for years: diversification to protect against big losses should include allocating 5-10% of a portfolio to gold and gold-related investment vehicles. Unfortunately for many, it took a 65% plunge in the NASDAQ for this advice to sink in. As little as a 5% aggregate increase in allocation of investment into gold would increase demand so much that the price of gold would surge beyond its 1980 levels. Additional terrorist attacks in the US (which the federal government describes as “inevitable”), instability of a Middle East government.

5. Silver is poised to surge.

During 1997 and 1998 Warren Buffet, one of the world’s most successful investors, bought 20% of the world’s silver bullion for $650 million. Bill Gates and George Soros are believed to have also purchased large amounts of silver in the late 90s. Demand for silver is growing. The US Mint, which has sold over 100 million 1-ounce silver bullion American Eagles since the program started in 1986 (8.9 million in 2001), has been manufacturing the coins with silver from the Defense National Stockpile Center. The Stockpile is now depleted.

Beginning this year the Mint, a significant silver consumer, will purchase the metal on the open market. China plans to mint 21 types of silver coins in 2002, using more than 2 million ounces of silver, up from 474,000 ounces in 2001. Many other countries that mint popular silver coins are also increasing production. Industrial demand is up along with investor/collector demand. One growing application is silver-coated glass, used in windows to make homes more energy efficient. With US Department of Energy and EPA support, this use alone now requires over 5 million ounces of silver annually.

The Silver Institute reports that for the past 12 years demand for silver has outpaced production, often by over 100 million ounces annually. With shrinking above ground supplies and increasing demand, silver fundamentals are better than those of gold. The projected sharp rally in the price of gold could lead to an even higher percentage increase in the price of silver. I believe that’s why Buffet, Gates, and Soros, savvy investors all, have made such sizeable investments in silver.

6. Cash is a poor alternative to equities.

Individuals and institutions, fearing continued decline in equities, have increased the proportion of cash in their portfolios. It’s wise to keep enough cash for emergencies, but with interest rates dismally low, holding cash as an investment strategy is at best a lesser evil. The value of paper currency could decline right along with equities. Because the US is leading the way into deficit spending, the dollar is already sinking against the euro.

As the US and other governments go further into deficit, central banks throughout the world will be forced to increase the growth rate of money supply far faster than warranted by business expansion. In other words, they will print money that has no visible means of support. Investors, as they are already doing in Japan, will turn away from these devalued currencies toward gold. There is talk in Washington of “monetizing” the increasing (see point 2 above) national debt. In this context, “monetizing” or “monetization” refers to purchases of instruments of debt, such as T-Bills, by the Federal Reserve Bank, which would essentially create money to pay for the purchases. Latin American countries that have increased their money supplies to monetize debt have experienced hyperinflation.

A section of the Patriot Act, passed by Congress as a result of September 11, hampers terrorist operations by tightening controls on deposits, withdrawals, and movement of large amounts of cash. By making it more difficult to launder money, the Act also makes life more difficult for drug smugglers and for many retailers who, let’s face it, take advantage of cash receipts to avoid full payment of taxes. Will those who operate in the $100-billion-plus underground economy throw up their hands and give up their highly profitable cash ventures? Hardly. They will seek other compact, easily transportable ways of storing value. Their quest puts additional upward pressure on the price of gold, particularly on the price of US gold coins, the most liquid way to own the metal.

7. Investment quality US gold and silver coins offer special benefits.

Gold, silver, and platinum American Eagles, with their bullion content guaranteed by the US government, will certainly yield significant returns during a surge in the precious metals markets. If bought without paying outrageous markups to mass pitchmen, they can be a lucrative investment. In a period like this, however, there is a tendency for the price of investment-grade numismatic material to rise faster than the price of bullion coins, whose value is based almost entirely on the price of the metal.

Far more people move their money into bullion than into rare coins, but the market for bullion is much broader and the supply can be replenished from central banks and mining. History has shown that with a fixed supply (there will never be a new mintage of Gold Indians or Morgan Silver Dollars) and a smaller market, rare coin prices rise more steeply as investor interest increases. Investment-quality US gold and silver coins also confer privacy. They are not subject to the third-party reporting requirements that regulate the sale of stocks and bonds.

Furthermore, major gold producers such as Barrick have borrowed gold from central banks to hedge for several years ahead against drops in the price of gold. One effect of such hedging is that profitability of mining companies tends to rise more slowly than the price of gold. As new investors become aware of this practice, many will prefer to own physical metal. Most investors in bullion at $250,000 or below choose gold coins because of their superiority in liquidity over gold bars.

Chart 1: Price of an ounce of gold, January, 1975 to June, 2002.

Chart 2. Rare US Gold coins compared to the S&P 500.

Chart 2, above, compares the value over time of $10,000 invested in 1975 in the S&P 500 Index and a group of 10 rare US gold coins. Extremely rare and esoteric coins were not included, as they would not be representative of coins that trade actively regardless of the market period. The 10-piece gold set consists of one each of the following coins: $1 Type I, $1 Type III, $2-1/2 Liberty, $2-1/2 Indian, $5 Liberty, $5 Indian, $10 Liberty, $10 Indian, $20 Liberty Type III, and $20 Saint-Gaudens. All are MS65 condition and most common dates. An MS65 or higher grade from one of the most respected grading services (PCGS, NGC, ANACS) qualifies these coins as premium quality (PQ) – what I refer to as “investment grade.” Chart 1 reveals that in the 1979-80 energy crisis, gold bullion went up by about 280% while the group of 10 rare US gold coins shot up by 640%.

Many unfortunate investors, institutional as well as individual, were finally attracted to rare gold and silver coins at or near their January, 1980 peak. A similar phenomenon occurred more recently, when many investors bought Internet stocks just before that bubble burst. We are still at the early stages of a boom in the gold and silver coin market. While nobody can predict the market with certainty, but I believe for maximum return NOW is a better time to invest than three, six, or twelve months from now.

8. Coins have returned to the American mainstream.

Decades ago, coin collecting was a common pastime. If you are old enough, you may remember searching through your pocket change for dates and mintmarks, and pushing pennies into the circles on penny boards. Coin collecting is back. The US Mint’s promotion of the 10-year Statehood Quarters program has millions of Americans purchasing quarter boards and collecting individual coins and even rolls of quarters.

The Mint’s Sacagawea Golden Dollar program has also fanned the flames of desire for coins. eBay and TV home shopping channels have engaged the public with the beauty and affordability of US gold and silver coins, and with the concept of creating family heirlooms by purchasing rare coins. A new generation of serious collectors of investment-quality rare coins is evolving from this mass base of tens of millions of individuals. If the past is any guide, more will become serious collectors and investors as the media starts focusing on record high prices of gold and US gold and silver rarities.

9. Certified grading and professionalism makes the new bull market in coins more sustainable.

Twenty years ago, the 1979-1981 bull market in coins collapsed. As described in point 6 above, an index of the price of typical investment-grade rare coins increased 640% in just a few years. But that growth could not be sustained. One of the factors which undermined the boom was lack of confidence in the product resulting from inconsistent, disputable grading. Fly-by-night numismatic investment companies entered the market, like the influx of real estate agents during a home-selling boom.

Higher-graded (MS 65 and up) pieces had appreciated the most and received the publicity. To the untrained eye, little separated these “gems” from coins of lesser quality. But the boom had widened the price spreads between grades from perhaps 50% or 100% to the 400%-600% range. Accurate grading became critical, but many of these “instant advisors” lacked the skill – or the desire – to provide it. Creditable third party grading services that would encapsulate coins and guarantee their quality weren’t available. In the mid-80s the coin industry was revolutionized by the advent of services which authenticate and grade coins and encase the information and the coins in tamper-evident transparent plastic “slabs.”

Today, certification by creditable services such as Professional Coin Grading Service (PCGS), Numismatic Guaranty Corporation (NGC), Independent Coin Grading Company (ICG), and Amos Numismatic Authentication and Certification Services (ANACS) endows coins with virtually instant liquidity. They trade on nationwide dealer networks, similar to shares in a company or mutual fund, but without fear of bogus bookkeeping.

During the bull market of 1979-81 investors also had to operate without knowledge of a key fundamental: the existing supply, or “population,” of rare coins, broken down by type and grade. Certification companies such as PCGS and NGC now publish census and population reports which allow collectors/investors to know precisely how scarce many of the gold and silver rarities have become. Publicly traded rare coin companies like Coin Universe (NASDAQ: CLCT) help investors and potential investors by displaying on the Internet charts of price trends and historic price levels.

Professionalism has been assured by the Professional Numismatic Guild (PNG), which maintains strict membership standards and demands that it’s dealers adhere to a Code of Ethics (posted on pngdealers.com), violations of which can lead to expulsion. Many coin buyers (30,000 and growing) also protect themselves by joining the American Numismatic Association (ANA), the world’s premier organization for coin collectors. The ANA’s mediation service assists members in resolving disputes arising from unsatisfactory coin transactions with dealers or individuals who are also ANA members. And, as you can see by visiting their website, www.money.org, the ANA offers an abundance of current and historical information about the numismatic world.

Twice a year the ANA hosts huge gatherings of coin collectors: the National Money Show and the ANA World’s Fair of Money (July 31-August 4, 2002, in New York City). These shows are known throughout the coin world for their educational programs (60 hours are scheduled for this summer’s World’s Fair of Money) and their “bourses,” which bring together buyers and sellers, large and small, of every imaginable variety of coin. A thriving collectors’ organization, professional guidance, excellent risk disclosure, statistical information, and instant liquidity now provide large numbers of new buyers of gold and silver coins with the confidence required to sustain a robust market.

10. Coin dealers have discovered mass marketing, raising demand.

Coin dealers have learned how to market rare coins to the general public. Home shopping channels sell thousands of coins a day. I do not recommend buying from them – a creditable, PNG-certified dealer can normally beat their prices by 10 to 30%, and the quality of the coins sold on TV is often suspect. .But there is no denying the pressure TV sales put on the supply of coins.

Coin dealers selling graded rarities have also learned how to promote and market to a wide audience, as demonstrated recently by the publicity around the sale of coins from the wreck of the SS Central America. Hundreds of thousands viewed the “Ship of Gold” exhibit when it was on display around the US, resulting in a complete sellout of the tens of thousand of gold coins salvaged from the ocean bottom.

Watch for increasing media coverage of the upcoming sale of a 1933 US $20 gold coin. When it goes on auction in New York City July 30 this rarity is expected to fetch a record $8 to $10 million. The publicity surrounding this record-shattering price has the potential to focus public attention on investment-grade rare coins as a viable alternative to traditional investment vehicles and other tangibles.

The Internet has broadened and deepened the revolution in the coin market initiated by certified coins. Enter “coin” and “auction” into your browser and you will discover that at every moment of the day and night dozens of coin auctions are underway. These auctions bring together buyers and sellers of coins from every country, every period, and every price range. They increase the demand for quality US gold and silver rare coins, but, as we have already described, the supply is inherently limited.

To meet the unbelievable demand for Statehood quarters, the Mint has stamped out over a billion each for many of the coins in what will be a set of 50. The Mint will never, however, manufacture even one more of the gold and silver coins designed and minted in the 1800s and early 1900s, even though most of them were melted down when the US went off the gold standard.

11. Ground-level eye evidence confirms that supply is down & demand is up.

In the past 90 days I have participated in three major coin conventions and had dozens of conversations with large and medium size coin dealers. To a man/woman, the dealers have shared with me that their inventories of investment-quality rare coins are at critically low levels. They are prepared to pay much higher prices if they locate a substantial quantity of coins. I encountered an eerily similar situation just before the 1988-1990 bull market, the last major rally in coin prices.

The recent rally in gold has even caused a scarcity in what was considered to be a plentiful supply of $20 gold Saint Gaudens in low grades. Wholesalers are backordered and prices for these Saint Gaudens are increasing faster than bullion prices. Headlines in weekly trade publications such as “Buying Fresh Material is Difficult,” Wholesale Buying Strong,” and “Quality Still the Rage” confirm that demand for investment-quality coins is growing. Analysis of auction results and action on the trading networks also reveal record demand confronting little new supply.

Taken together, these 11 indicators point to a major rally in high-grade, investment-quality gold and silver rare coins, with a potential 300-500% increase over the next few years for selected rarities. For those with foresight and the courage to act, this is a major opportunity.

What to own to profit from the upsurge in the coin market

Short term investors: For the short term, protect yourself by investing in highly affordable bullion-related coins such as $20 Gold Liberty and Saint Gaudens graded MS62 to MS64 by PCGS, or NGC. Also, 80+ year-old brilliant uncirculated Morgan and Peace silver dollars in original 20-coin rolls. These rolls represent an excellent low risk investment with the potential for great percentage increase.

Medium term investors (6 months to 3 years): $1, $2.50, $5, $10, and $20 US Gold coins dated prior to 1933, in MS63 or higher (depending on your budget). Better date US Morgan and Peace silver dollars in MS65 or higher. To guarantee the quality of these rare coins, select only those certified and encapsulated by PCGS or NGC.

Long term investor/collectors (over 3 years): PCGS or NGC-certified Gold and Silver rarities. High-grade coins over 100 years old, with census and population numbers under 100 coins. These rarities must be hand picked by a qualified professional with a minimum of 10 years of experience. Coins of this quality are always in strong demand and are rarely available to the general public. Selecting an experienced, ethical representative is essential to selecting the right coins. If you are buying coins primarily as an investment, be sure that your representative/dealer understands that profit is your goal, as opposed to acquiring a particular coin to fill a gap in your collection.

A Professional can help you buy the right coins at the right price. Rare coins have, over the years, proven to be one of the most rewarding investments – if you purchase the right coins at the right price. How do you find a reputable, ethical coin professional whom you can rely upon to help you invest with confidence? Professional Numismatists Guild (PNG), the premier coin dealers association, publishes a Directory of its 300+ worldwide members. PNG requires financial and character scrutiny by an outside firm, has a thorough screening process, a strict code of ethics, and requires a minimum five years of full-time professional numismatic experience.

I will be happy to send you a copy of the PNG Directory free of charge. It’s a good step toward finding a trustworthy personal guide who will help you avoid the pitfalls and grasp the opportunities of coin collecting and investing. I can also give you detailed information on the recommended grading services.

Call me at (888) 454-0444 or email me at barry@coinmag.com.

Barry Stuppler, a 40 year Professional Numismatist, has helped thousands of collectors and investors to develop a successful strategy in acquiring high grade Gold & Silver rare coins. He is known in the numismatic community as an advocate for collectors and investors protection. Now in his second term as a member of the Board of Governors of the American Numismatic Association (ANA), he served as chairperson of the ANA’s Consumer Protection Committee.

He is also a founder and a member of the Board of Directors of ICTA, the coin community’s Washington DC lobbying arm. Throughout his four decades as a coin dealer/consultant, Barry has been active in the rare coin community’s fight to set ethical standards for dealers. He has consulted with US Postal Inspectors, the Federal Trade Commission, and the FBI to squash scams against coin collectors.

In the 1980s he spearheaded a successful legislative effort in California to provide sales tax exemptions for rare coins; similar exemptions have been passed by most states. In the 1990s he founded and published Coin Connoisseur, a magazine devoted to education about the opportunities and pitfalls of coin collecting and investing. He has been a member of Professional Numismatists Guild since 1982. You can reach Barry at 888 454-0444 or barry@coinmag.com.

Wednesday October 2, 2002
Copyright © 2002 Barry Stuppler.

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