Don Kagin: The Impact of Historically High Gold Prices on the Rare Coin Market (Video)

By CoinWeek….

With gold on a historic run, coin dealers nationwide have seen an increase in the number of sellers in the market. On Friday, May 2, coin dealer Don Kagin sat with CoinWeek Editor Charles Morgan to discuss the impact of rising gold prices on the rare coin market and his firm’s business selling numismatic gold coins produced by the Spanish Mint.

This discussion took place after Charles and Don spoke about fractional ownership of a $100,000 Gold Certificate specimen.

Transcript (edited for clarity):

Charles: Don, before I let you go, I’d like to switch gears. Maybe you’re not prepared to talk about this, and if you can’t, we can cut this out, but I wanted to speak to you about what’s going on with the gold bullion market and how $3,200 gold is impacting your program with the Spanish Mint.

Do you find that there are challenges involved with bullion being this high? Do you see collector behavior changing because of where bullion is? How is this impacting your bullion coin program?

Don: Yes, and it’s affecting the entire modern Proof collectible market. The good news is that gold’s gone way up, and all clients who have bought anything earlier are very happy right now.

The unfortunate thing is that when that happens, and it doesn’t happen very often, especially not soaring the way it has- the price of gold- but it crushes the margins over gold [spot] that one is willing to pay because you don’t know what will happen on a day-to-day basis. While the Spanish government provides the coins to us at a certain percentage over gold, as they are susceptible to the market, you have to remember that all of the Spanish gold coins that we’re the exclusive distributor for are Proofs struck in very limited quantities.

So, when we are at the mint, we give them a couple of pointers on how to handle the coins. They literally have a person there who is taking on a planchet at a time and putting it in the collar, striking it, and taking the coin out, while another person gets rid of all of the dirt or whatever is in the air. They can only do 350 coins a day the right way, rather than the bullion American Eagles, or whatever, which are churned out by the tens of thousands. So, they have a cost that’s a little bit higher than the cost of a normal bullion coin.

Several of our clients bought the Spanish coins primarily as a bullion item, and they were, you know, favorably priced before; they’re not so much now. They have come down, the premiums have come down, but you know, you can buy a Krugerrand today for melt, or very close, but the costs involved once again are much higher for a Proof limited quantity coin, as these are, so it has impacted that. Still, we have people who want to own one of these beautiful reverse Proof gold coins.

I had somebody who wanted to buy a bullion coin. I gave them the option of a Krugerrand, an American Gold Eagle, or a Spanish bullion coin. They took the Spanish bullion coin because it has that anti-counterfeiting device that no other coin has—it’s like a hologram on the back of the coin. So bullion buyers are buying up for that, but mostly the people that are buying it have already bought other Spanish gold coins, or find it cool. But it has impacted our business.

We may be doing a silver Proof issue early next year, though. That has a relationship with the United States and its 250th anniversary.

Charles: I often wondered if you go back five or ten years, and some of the hard money advocates within our industry were projecting big numbers for gold and silver, like what the ramifications would be for those numbers being reached, for the type of person who’s our typical buyer. I always assume that if gold reached a certain level, you’d see more institutional buying and selling than you know the individual who will go to their local coin shop and buy an ounce of gold every couple of months or stack silver coins. I just felt like for a for a numismatic industry that is looking for some margin on you know pre-’33 gold coins or is selling the modern bullion in coins as collectibles that there is a Goldilocks zone for what that metal can cost for it to be a profitable business where you’re turning over enough inventory and then once you get past that level you’re pricing the product out. Do you feel like there is truth to that worry of mine that there is a zone in which, like you start to see, you know, lower market participation because of cost, and if it goes up to $4,000, then that opens up another set of challenges for like modern mint-made coins?

Don: Well, I think so. I believe volatility has a lot to do with it, too. If [gold prices] were stable… If gold is stable at the $3,300- $3,400 level for a while, I think the
margins will come back a little, and people will feel more comfortable. You know, it’s only 10% of my business. I mean, I’m a vintage coin dealer and currency dealer, and I got into this serendipitously. I wasn’t looking to get involved in this. Still, I tell you that the coin market itself seems to be pretty good for good items that are hard to find, and good quality and fresh material are selling well today.

So, I don’t worry so much about, oh my gosh, what would happen if gold was four, five, $6,000 an ounce, what would it do. I don’t know. I did not predict that it would be so high. I didn’t know that central banks, you know, maybe China’s trying to amass enough gold to have their own currency replace the dollar in the world. I don’t know if that’s causing this to go up, or whatever. I’m just there in the market to help facilitate people buying and selling it.

Charles: Well, I figured you’d be in a unique position to talk about it since, like you said, 90% of your business isn’t bullion, but in recent years, you’ve been interfacing with that side of the market. You don’t necessarily depend on it, but you are you are subject to the whims of the market in that respect, and and I know you’re building a a program that does have meaning for you, so I appreciate your insights on that.

I was curious, I mean, I’ve been talking to several bigger wholesale guys, and they seem to be net buyers, I think, at this point, of gold. You know, one of them commented to me, and he is a pretty prominent guy, he said that one of his guys went to the counter to help someone who was bringing in gold to sell and wrote a check for $100,000 and he came back and said “Here’s what we bought.” and lays the coins on the table. So this dealer looks at the coins and says, “Wow, these stacks seem to be getting smaller and smaller lately.”

Don: Yeah, well, that’s the case when the commodity is [going] higher and higher. I don’t see gold demand going down in the long run. I think it will continue to go up, especially if we have volatile times in the future. Many people still appreciate gold for all the benefits it gives, and we’re not leaving that business. But, yet, it has impacted us with the price of gold going up so far, so fast.

Charles: I think on that point, you’re probably absolutely right. I think it is the volatility, which means that it’s muscle memory. So, if you have in your mind the idea that gold’s worth $1,800, or $2,000, you’re not going to be so sure about buying at $3,200. But if all you see is $3,200 or more for the next two or three years, then that changes your psychology about purchasing the asset. So, I take your point. I think you’re absolutely on to something with that.

Don: Yeah, well, again, my guess is as good as yours, or probably not as good, but you know full well, if we’re all good prognosticators, we’d be billionaires.