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Aug 17 2018 16:59 EST

A Shocking Look Back at Gold Coin Premiums

February 8, 2015 Facebook Twitter LinkedIn Google+ Gold

Viewpoint: A Shocking Look Back at Gold Coin Premiums

January 02, 2014
By Mike Getlin


Most people think there’s only one kind of gold. Yet if you ask someone who owned collectible US gold coins in the late 1980s, they will probably set you straight. While gold itself languished through the latter part of the decade, semi-rare gold coins posted some of the most spectacular price gains in the history of the precious metals markets. Some generic $20 Saint Gaudens coins in higher grades saw prices shoot up more than fourfold through the decade. That’s the power of the premium market.

We all know the basic drivers of the gold spot price: Inflation, currency crisis, geopolitical crisis, and economic instability. But what are the mechanisms that drive coin premiums? They are much harder to pin down. That said, understanding rare coin premiums may provide a lucky few collectors and investors some insight into a whole new world of appreciation and value retention. Considering that the rare coin market has been quiet for quite a while, it may be long overdue for some action.

Before we go into this, we should make it clear that investing in rare (or semi-rare) coins is not for everyone. The markets in these coins are extremely small and can be quite volatile. In addition, the cost in acquiring them is significantly higher. If you’re looking to participate in rare coin markets, you should be ready to be extremely patient. You should never invest any funds you expect to need any time in the next five years. Holding period flexibility is crucial to making good decisions in the premium markets.

Whereas most markets operate on principle of supply and demand, premium coin markets are a little different. It’s all about demand, because the supply is relatively fixed. Since they will never again strike a 1908 Saint Gaudens, supply is mostly relegated to the recirculation of these coins among investors and collectors. This statement is generally true of unique coins (ones of which there will never be another struck). In the end, what really matters is demand.

So where has the demand been for the last ten years? It’s been sharply focused on the bullion markets. Since gold began its historic run in 2001, physical coin buyers have poured money into bullion products like never before. Every major refiner and mint in the world has seen record sales in the last five years. As bullion prices skyrocketed, they stole the premium markets’ thunder. Now of course, we are starting to see that the future of bullion is a bit more clouded than it has been over the last several years.

All of these markets move in cycles, and 2013 was not the first rough year for gold bullion. While gold took at 27% hit in 2013, it actually fell by 30% and 35% respectively in 1980 and 1981. In other words, we have a reasonable comparison for today’s market. That is not to say we are predicting another off year for bullion. To the contrary, we believe gold itself may be poised for a strong recovery. That said, we are also starting to see hints of increased demand in the premium markets. It’s certainly worth giving the premium markets a fresh look considering the uncertain future of bullion prices.  

First, let’s lay out a couple general benchmarks. In 1980, gold spiked to above $840 per ounce. By 1983, it had fallen to $440 per ounce. Three years later, it began 1986 all the way down to $360. All in all, it fell more than 55% between 1980 and 1986. You might have expected this slide to be reflected in the premium markets as well. After all, they’re all gold right? Not so fast.

Take a look for a moment at $2.5 Liberty coins in Mint State 65. This is a high grade coin, but not terribly rare. You could pick one up today from any of a thousand dealers across the country. In 1980, they were wholesaling for about $1200 per coin. Three years later, when gold had lost nearly half its value, they were still trading at $1200. By 1986, as gold had continued its slide, these coins rocketed to above $4200 each.

The same sort of movement could be seen in lower grade coins as well. $2.5 Indians in MS60, by all accounts a very generic coin as collectable US gold goes, jumped from $250 per coin in 1983 to over $450 in 1986. That’s an increase of 80% while gold actually fell by nearly 20%. $10 Liberty coins in MS60 also jumped up 80% in the early 1980s as gold was plummeting.

Finally, the MS65 Saint Gaudens marched steadily upward between 1980 and 1986, increasing in value by more than 400% while gold values were cut in half.

So what was the methodology by which I chose these coins to compare? There wasn’t any. I opened a Coin Dealer News value graph book to random pages and this is what I saw. There is no doubting that there’s a relationship between the decreasing spot price and the spike in these coin values. The only logical conclusion is that some of the demand for bullion slowly made its way into the premium markets over the years after bullion topped out.

You see people still wanted and needed to own gold coins. Simply because the bullion market was not ticking off double digit gains each year didn’t mean that the world was any safer, the economic future more stable, or that the fears of inflation had forever subsided. Folks still wanted to own gold, they just had to be a lot more careful about which type they chose to buy.

Let’s be clear that we are not throwing in the towel on gold bullion. Given the drastically overbought stock market and the fact that many of the forces pushing prices down may be waning, there is a significant chance of a very strong recovery in bullion this year. That said, we would never be arrogant enough to say so with certainty. The good news is that as an individual investor, you don’t really need to know for sure; you just need to prepare for either scenario. By owning a combination of bullion and premium coins, you will be less dependent on the bullion market and better diversified for what we have to admit is a much more complicated gold market than we have seen in a long time. If we use the ‘80s as a template, it might be time to start looking much more closely at non-bullion options.
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