Wall-Street Bears are Rummaging for Food

Wall Street has been in the precious metals markets for over two decades, assisting clients in bolstering their retirement accounts with bullion. Morgan Stanley, among others offers clients the opportunity to own SEC approved bullion in Gold, Silver, Platinum, & Palladium. These can be acquired in various products including bullion bars, American Eagles, American Buffaloes, South African Krugerrands, Austrian Philharmonics & Canadian Maple Leafs.

The catch is the client never takes physical possession of the bullion: it is held in SEC-approved vaults. These vaults are regulated to hold a one-to-one ratio of metals to client holdings. In 2007, Morgan Stanley had to make restitution to clients for not keeping this agreement with their clients despite still charging clients storage fees. (read further here)

Two decades ago a number of major Wall Street firms entered the rare coin market. Merrill Lynch, Kidder, Peabody & Co. Inc and Shearson Lehman Hutton, each took root during the heady days of Wall Streets’ bull-run in the late 80’s. Each one had a slightly different approach to rare coins.

The first two started funds that ended in well documented failure. Shearson Lehman Hutton actually sold PCGS & NGC rare coins in their 11,000 locations. Yet, shortly after the previous two folded, Lehman down-played this investment, stopping altogether when the company filed bankruptcy for involvement in the sub-prime loan scandal.

Wall Street once again is looking at the rare coin market as an investment. They have watched the decade-long rise in prices and feel that now is the time to re-enter. One fund has recently announced it will pour upwards to a half-billion dollars into four separate funds with holdings exclusively in rare coins & precious metals.

This fund involves a major player in the coin market with previous, all though dubious, experience in coin funds joining forces with a known Wall Street fund manager. They hope to finally perfect the elusive formula of melding coins and Wall Street money into a winning fund.

While this has a great potential for success it has a previous track record of failure and decimating the rare coin markets. The PCGS 3000 Index is a method of tracking the price fluctuations in 3000 rare coins as determined by experts in the rare coin industry. This index has grown by 6667.25% since 1970 when they started keeping track.

As shown by this chart there is two very distinct peaks. The first is during the gold & silver runs in 1979 & 1980. This is a time prior to third-party grading services entering into the rare coin market and was driven exclusively on the price of metals.

While an impressive spike at the time, it pales in comparison to the run made in 1989 and 1990 fueled by Wall Street entering the rare coin markets based on the promise of standardized grading. This is not to say these grading services were responsible or at fault. In fact, to the contrary, these services have added a much needed standardization to this market; protecting clients & investors from acquiring counterfeit or doctored coins potentially costing thousands of dollars in investments.

The second spike took prices on most coins to levels still not seen today. If you can find a 1989 Whitman Red Book Price Guide you will find prices at the height of the rare coin bubble. Try getting those prices today.

There were a number of factors in this spike, the search by Wall Street to find alternate investing after the 1987 crash along with the aforementioned entry into the market of third-party grading. Another factor was the short term success of the funds developed in the latter part of 1986. It was a rush to rare coins similar to what we saw 10 years later with tech stocks in the Dot.Com bubble. Wall Street saw the past returns on rare coins and jumped in with both feet.

 A couple of other charts also confirm to varying degrees the similar results to both spikes. As shown below:

The above chart shows all coins tracked by the PCGS 3000 that are in Mint State (MS60 to MS70) according to the grading services. These coins are the cream of the numismatic world, while not all are showing tremendous gain individually. We see the same profile as the entire market.

The above index follows a smaller segment of rare Gold Coins in MS60 to MS70. (Although, there are no rare coins that qualify for MS70) It basically mirrors the previous charts with similar results. These coins while rare by grade may not actually be rare by type or year.

There is one final chart that stands out from the rest. It is the Key Dates & Rarities chart (see below). This is comprised of all key dates for each coin type in all metals. It also includes those coins that are truly rare or scarce based on actual limited supplies.

One of these key series is the Carson City Mint $20 Double Eagles. It has a number of scarce coins including the king of rarities in this set, the 1870 Carson City $20. This coin is estimated to only have 45 to 55 survivors most of which are in the VF to XF grades. Only a handful are in the AU grades and can command upwards of $400,000 plus.

As you see these coins have the two spikes in 1979-80 & 1989-90 but what you don’t see is the dramatic drop off. Instead you have steady growth over the last two decades with a small retraction after the Great Recession of 2008.

This segment of the rare coin market shows the least volatility returning consistent gains over the last two decades. Many investors have enjoyed these type returns over the years as they have invested in this segment of the rare coin market.  It is these coins that we see the greatest potential to preserve your wealth for the long term with the best potential for gains.

Conclusion:

With Wall Street heading back into the rare coin market now is the best time to acquire before the prices are run up, removing hundreds of millions of dollars in rare coins from circulation. Will there be a spike and retraction as in the past? No one can tell the future. Yet, if Wall Street holds true to form, you will see an initial frenzy driving up prices then at minimum a retraction as they settle into this market for the long term.

You as the savvy investor can take advantage of this trend by getting in before the rest of Wall Street gears up and enters. Making solid acquisition in Key Dates & Rarities should allow you an investment that can bring years of returns and the security your investment will be protected.

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