By Don Kagin, Ph.D. – Kagin’s Inc.
The following chapter was taken from Don Kagin’s new book How to Profit from Rare Coins Now. Signed copies of the book plus bonus material is available by clicking this link.
Why Invest in Gold and Rare Coins Now
Investors have the same basic objectives of asset preservation and capital appreciation. We’ll begin by examining the factors behind the upcoming precious metals bull market. We’ll put the fundamentals to the common sense test—is the move supported by supply and demand or by smoke and mirrors? Is the bullion market behaving in the manner we’d expect at this stage?
As of fall of 2014, the stock market is showing signs of slowing its rate of rise and perhaps peaking. Will there be another correction, or have we finally arrived at the big bear turn? How will this influence precious metals in the short term?
What effect will all of this have on numismatics?
From there, we’ll isolate different strategies for assembling numismatic portfolios with positive high risk/reward probabilities. Investment decisions typically take the form of comparing alternate paths’ advantages and disadvantages. We’ll discuss do’s and don’ts from both the buy- and sell-side.
Throughout, we’ll analyze market behavior. Only instead of wrapping up our hypothetical situations with non-committal advice or vague language, we’ll use specific if-then action statements. We’ll discuss how to develop good habits and explore various avenues in which to sharpen our trading instincts.
We’re going to skip the academic arcane issues usually associated with this genre and go straight to the tricks of the trade. We’re going to train our brains to buy low and sell high.
Same Game, Different Rules
Doesn’t feel like it’s been six years, does it? It doesn’t feel like six years since the entire financial system stood at the brink of collapse, because there still remains a palpable pall in the aftermath. It could happen again. Perhaps not as swiftly or deeply as last time, but nonetheless unexpectedly and devastating to many.
Since the ’08 financial meltdown, the traditional ground rules for investors have changed. Despite record highs, stocks and real estate are no longer automatic safe havens or no-brainer sure things. The Fed is determined to try and have it both ways. The printing presses are running full bore, and fed funds—the rate at which banks lend each other money—has been kept artificially low in order to stimulate demand. Something’s going to have to give.
In the wake of the recession and subsequent government stimulus programs, the markets have been unable to establish sustained periods of positive footing. It’s disconcerting. No sooner do traders’ spirits rise, when news of a disappointing government statistic or a series of anemic quarterly reports shines a bright light on the economy’s blemishes.
A swirling wind storm of uncertainty is blowing through Wall Street and, indeed, on all of Main Street, too. Recent high unemployment, fiscal cliffs, temporary government shutdowns and sovereign debt crises cast doubt on any further substantial moves to the upside. Price to Earnings ratios are already tough to justify.
A lot of money is on the sidelines. It sits idle in the hands of investment advisors who know of few credible alternatives to traditional avenues.
People may well refer to this period in stocks as a bubble. The characteristics of market cycles in a bubble phase are tricky, even for seasoned professionals. It’s a nimble trader who can successfully navigate the upcoming volatility that will surely plague the financial markets in the years to come.
It may come in three weeks or three years, but the next big cycle for stocks will most likely be down. For most investors, who are not actively managing their positions on a day-to-day basis, it’s an imperative to shift some percentage of those funds into more attractive options.
As an investor, you will want to consider short- as well as long-term planning. If not necessarily on a day-by-day basis, it’s important to keep abreast of the market’s comings and goings—run through some quick procedure using the corner of your eye to get updated—because market timing is the key to success. Or, if it is on a daily basis, perhaps you’ll give The Wall Street Journal ten minutes, then read Coin World weekly cover to cover—something like that.
To stay current doesn’t require an inordinate amount of time. But you don’t want to drift away from the action so far that when it becomes time to act that your reflexes are slow. We’re going to pick up market timing again in a minute, as that’s what this whole book is about, but first let’s see how numismatics and precious metals stack up against financial, real estate and other collectible alternatives.
Re-thinking Traditional Wealth Preservation Tools
Traditional wealth preservation vehicles typically include conservative, longterm government and corporate debt instruments. In recent years, however, asset appreciation of triple-A rated bonds have not kept pace with the Consumer Price Index, let alone real inflation. In truth, your wealth is not being preserved at all, but is slowly eroding. On paper everything may appear to be shipshape, but the sophisticated investor, like yourself, ought to know how to read between the lines.
Conventional savings instruments do not make investment sense for anything other than temporarily parking a chunk of cash. Bank and S&L interest rates are around 1%. The yield on U.S. Treasury 10-year notes hover around 3%. Risk-reward in the bond market, presently, is a long way from ideal. Bond prices and yields are inversely proportional. Logically, there is only one way for bond prices to go in the long term, and, at the risk of stating the obvious, it’s never a good idea to buy at the top of the market.
Another traditional safe haven is real estate. While real estate has its tax advan- tages, property values have plummeted from their peak in 2007. Flash-forward to the present, despite pockets of recovery, and wealthy enclaves that had barely registered a blip on the downside, economic projections anticipate an overall slow recovery. It’s a buyers’ market, and they’re being selective about their purchases.
It is a function of the times that we place a premium on liquid investment alter- natives. Real estate, of course, is an asset that cannot be readily converted into cash, especially during a recession. For families in recent years trying to sell their home or investment property, they have had to find out the hard way, experiencing frustration and lowered expectations that comes from waiting for the telephone to ring.
A Portrait of Profit
For those looking for decent returns, say 6% to 8% or better, there are few tra- ditional options left. Erudite investment advisors and pundits can’t get a handle on the stock market. The fundamentals are stretched to the limit, and there have been subtle signs it may roll over. The consensus of where the market is going over the next several years is open for debate.
Any mention of good news, say, any tentative agreement between debt-ridden European Union members may bring on celebratory toasts and give stocks a tempo- rary boost. But there is no cause for celebration—it’s captain and crew patting each other on the back. Look how well we’re plugging the holes of our sinking ship! Until the next, inevitable leak sounds the alarm, and then it will be back to manning the pumps.
Europe’s economic ship is listing badly. You have to wonder how long they can keep it up before there’s a mad scramble for the lifeboats.
Uncertainty creates a skittish atmosphere for long-term investors, which is why price movements have become increasingly choppy. This is your signal, as a forward- thinking investor—now is the time to make a move toward alternative strategies.
The obvious shift is toward hard assets. What, specifically, are our options?
Rarities, including art, antiquities and quality gemstones, are good possibilities. High-end works of art have demonstrated spectacular returns, as mounting popularity shows no signs of abating. A magnificent 1969 triptych, Three Studies of Lucien Freud, by the late British painter Francis Bacon sold for a whopping $142 million. A new world record price for a modern painting sold at auction, it shattered the old mark, set by Edvard Munch’s The Scream, which sold in 2012 for $119 million.
Unfortunately, these collectibles present a number of problems from an investor’s standpoint. First, market conditions vary considerably from one area of collectible to another. Antiques, for example, often are literally of unknown worth until offered for sale. Their value may vary from one section of the country to another. The same conditions exist with regards to works of art.
Gems, especially diamonds, are traded at the wholesale level in major markets, such as Antwerp and New York City. But it is a highly specialized trade group and participating in this arena isn’t readily feasible even for sophisticated investors let alone for the average man or woman on the street. Never mind too that gemstone prices are notoriously difficult to pinpoint at any given point, which basically translates to the only money to be made in diamonds is as a broker—buying at wholesale and selling at retail.
Although, to be fair, in a mad sort of way, the DeBeers monopoly in the diamond market does set a sturdy floor on price. They’re extremely easy to transport and nearly impossible to trace, which is why moneyed criminals like them so much. But the South African mining company controlling price appears keen to keep engagement rings pegged to income levels, severely limiting diamond’s upside potential.
Then there are the unusually high commissions typically found in unique collectibles. The difference between what you pay and what you can sell a niche collectible for, makes it extremely difficult to make money even in the best of times. If the commission on an object d’art is 30%, it may be many months of favorable winds just to reach the break-even point.
The way the precious metals and rare coin markets can now package its products, with standardized measuring sticks, relatively high liquidity and low mark-ups on transactions makes it the most attractive method in which to diversify out of tradi- tional stocks and bonds.
Check’s in the Mail
Part of the fallout from the financial meltdown was a clamor for reform. While some of the new rules and regulations that comes from it may end up being help- ful staving off future disaster, financial reform will almost certainly have a negative impact on privacy and estate planning.
In an atmosphere in which the U.S. government continues to seek new revenues to keep pace with its expanding budget, estate planning options to legally avoid heavy tax burdens will come under close scrutiny.
Traditional investments’ competitive advantages, like capital gains and low estate taxes, are ripe for damaging legislation. As such, they do not warrant the same level of confidence when weighing the various factors that go into your decision-making process. A smart-money investor must know his options, and be savvy enough to think outside of the box.
For many collectors and investors, bottom- line profits are not the only mitigating factor. The challenge of assembling and creating something never before accomplished has entertainment, if not ego, value. A collector’s goal could range from acquiring the first or finest set of a type of coins or currency, or owning the most important coin of a series in the finest condition. Making money from your investments need not be a dour sport!
Historically, building a collection of the finest specimens of a particular set of coins or a acquiring great Legacy specimens yield the highest rates of appreciation relative to other numismatic strategies.
A difficult task, relatively few succeed in acquiring all the items that would consti- tute a complete collection. Yet, the attempt, in a way, is its own reward—not just from the standpoint of appreciation, but from a perspective of accomplishment, too. Like the angler’s trophy catch mounted on a wall, collectors rightfully have the same pride for their most cherished pieces.
New Gold Dream
If you were savvy or lucky enough to purchase traditional-asset vehicles at stock market lows you may be susceptible to an if-it-ain’t-broke-don’t-fix-it mentality. The problem is that the theory is the sweet bull-market runs of yesteryear are not guarantees of forever. It’s time, now, to shift a well thought-out proportion of your portfolio into more attractive opportunities.
Over the last decade—perhaps more importantly, over the last 40 years—two of the best performing asset groups have been precious metals and numismatics. Close scru- tiny reveals convincing arguments on two fronts, from both pro and con perspectives.
If your only concern is to be in a good spot from which to throw darts, gold and numismatics are where you want to be while taking blind aim. More than a snide aside, it’s an important point of picking winners. Narrowing the field from myriad investment possibilities boils down to an exercise in odds-making. The entire job of a speculator is to take 50-50 propositions and turn those odds to his favor. The probability of picking a winner from an asset class trending higher is far greater than fingering the exception among one rife with losers.
While making the case for diversification, it is important to keep in mind that it’s a balanced portfolio we’re after. The old adage of not keeping all your eggs in one basket is a good one. The point to carry away from this chapter is that stock and bond investments now require highly selective criteria—and not necessarily an occasion to dump your entire net worth on a flyer in Comex gold futures.
One strategy might consist of diversifying paper holdings with physical precious metal assets in order to safeguard against inflation and recessionary cycles. Another might be supplementing your children’s college education fund with regular purchases of investment-quality coins. With all of the uncertainties in the marketplace, it’s prudent to protect your assets with products that have historical ties to purchasing power.
Government currencies and international stock markets fluctuate with market trends and shifting political climates, whereas precious metals’ prices tend to track real wealth. Throughout most of the 20th century, gold produced profits in the worst economic times. During the Great Depression, for instance, gold rose in value by about 75% at the same time the dollar was plummeting.
Savvy investors of the 1930s turned to gold for wealth preservation. Granted, the present-day economic scenario is not identical, but there are enough similarities to indicate that diversification is the smart play. At worst, if prices become stagnant, gold is an insurance policy against financial calamity. In the more likely scenario, gold and rare coin prices continue to move higher.
As such, a thorough understanding of tangible investments—and numismatics in particular—is necessary in order to give yourself the greatest chance for making pru- dent decisions. These are not formulaic algorithms that you can plug into a computer. It’s sophisticated juggling-act of arranging and rearranging and prioritizing facts, fig- ures and conjecture that ultimately will determine how well it adds up when it’s all said and done.
A surgeon friend of mine once said that he could teach me how to remove an appendix in 15 minutes, but that they go to medical school for seven years so they know what to do if anything goes wrong.
The following chapters are your seven years of medical school—because you’re the type of investor who guards against catastrophe, who needs to know the most expedient way to get from point A to point B.
It’s to you, I say, welcome to the exciting world of gold and numismatic investing.