Beware: The Ide(a)s of 'Rare Coin' Dealers

By Jeffrey Bennett, Publisher

Jeffrey Bennett, Publisher & Collector

What you about to read is excerpted form an email, which I, the Editor/Publisher of The Federal Observer received on the evening of January 18, 2006.

If you are not familiar with gold and silver or the so-called “Rare Coin” market, which is aligned with it, nor some of the reasons why these goods are sought after all over the world, then this column will have little meaning to you, however it is our intent to educate you as to the pitfalls of what some call, ”the Industry.” What follows his inquiry was my response to him. - J.B

Ladies and Gentlemen:

My spouse and I are about to become first time investors in investment grade coins (IGC). We've researched various websites and must ask in what manner do you arrive at the MS grade of your IGC's. It's our understanding that IGC's are generally scaled starting at MS65 and higher, which is why we pose this question.

Also, have we overlooked your daily prices for gold and silver coins on your website? Or does one get this info. solely by telephone?

Should there be a financial crisis, i.e., collapse of the U.S. dollar, how would the owner of IGC's redeem them for services, goods, etc.? It's our thinking that IGC's could become a high end means of bartering when considering the fact that financial institutions might not be available to transact the sale of gold to paper money. Yes? No?

Lastly, do you sell IGC's via credit or debit card accounts?

Thanks in advance for your response.

Good Evening Sir and thank you for your inquiry.

You have opened up an interesting can of worms here, so please bear with me.

The first thing I will say is "buyer beware." The "IGC" or Certified "Rare Coin Market" is a relatively thinly capitalized market, which has been abused by many an unscrupulous dealer over the past quarter century and unfortunately - it is the buyer, who is usually being abused. More on this topic momentarily.

As for daily prices on our website, you'll note that most of the coins represented are fairly generic in nature, historic in value but not what I would refer to as investment quality - other than investment for security against a faltering economy. Given the current financial situation our country finds itself in - what better time to address our financial foundation - hence, what you see on our website. Prices change on a moment-to-moment basis and we can ill afford the necessary computer software, which would automatically adjust the prices with the changes in "spot" gold or silver.

As I conduct business with each client in order to meet their specific needs, prices are locked in at the time of sale at the prevailing rate. However, at our firm, we offer a fairly simple procedure, which no one in the industry will offer: on fractional, International gold specimens, your cost will range between three and ten percent above our cost, depending on the item and the volume purchased. Our cost on those coins currently ranges between $3.50 and $6.00 over "melt" value with a few exceptions.

As to your question as to how we arrive at the MS grade of the coins, which we offer; that question would not apply to the coins mentioned in the previous paragraph, although most of those have never been placed into circulation and all of them were minted prior to 1933 - making them at least, historic in value. Your question would however apply to what you refer to as IGC's. These would be "investment" grade coins, each of which will have been graded by a third-party, independent, professional grading service, such as PCGS (Professional Coin Grading Service), NGC (Numismatic Guarantee corporation) or IGC - each recognized as standard bearers within the industry.

In theory, the reference to MS-65 or higher being considered to be the most desirable is generally true - however that does not mean that any MS-65 or higher will even be that desirable. If the supply is extremely low and there is no market for that item - then you have just become the "collector" - for you may never recover your investment. Also, one must understand, that just because an MS-65 or MS-66 has been awarded that lofty level (certainly not the highest) no longer means that it will "perform" well. A common coin - no matter the grade - is still a common coin and yet what you may be able to purchase that coin for, may well position you for a pleasant surprise in the not too distant future. In order to better understand this, please allow me to give you a little homework assignment before we speak. Based upon your comments and question, I assume that you have been speaking with some other firms. I have no problem with this as it can give you an eye-opening education.

Homework - Part 1: Contact at least 3 firms of whom you may be familiar. They may be firms with whom you have spoken with or found on the internet. Ask of their current price on a common date, Certified (slabbed, graded) MS-66 Saint Gaudins $20 Double Eagle. Tell them that you are considering purchasing a number of them.

Now, let's see what kind of quotes you get. I can guarantee you that several or all of them will be (as of 01/19/06) in the $3,595.00 range. You may find slightly lower prices if you really push - but the standard in the industry for a specimen of this calibre is a 40% markup. Unacceptable in any industry in my estimation - and that does not just apply to the higher grade coins - and now you see where the "abuse" comes in.

Glowing promises will be made of how, "This coin once sold for "x" and today, with the current market conditions, they are poised for dramatic movement once more. Historically, when gold doubles in value, these coins gain at least three to four times." I am sorry sir - gold HAS doubled in the past five years - and the certified, high-grade coin market has remained relatively flat. Yes, there have been gains - but nothing like those promised.

Homework - Part 2: Pick up the phone and call me and I'll then tell you what our firm offers those very coins for. You will be shocked at the difference. It is your money and you want the best value for it. I will provide that.

I would like both you and your wife to understand that I am not against, what you call IGC's - I am just aghast at the hundreds of thousands of novices, who are taken - or bilked - out of millions of dollars every year because of the hype of some slicky-boy who sits on the phone and "sells" - yes - "sells" you a product, which he/she knows nothing about - just because some "recruiter" he/she met at a bar told him how much money they could make as a "broker" in the "rare coin business."

Personal History: I will be fifty-eight in February (2006). When I was ten years old, my grandfather sat me down in a bank vault and gave me quite a lesson in the history of money. On that very day, I began to purchase old silver dollars out of a bag in that bank vault - you could still do that in 1958 - when our money was still real. I paid a paper dollar for a silver dollar. I asked him why we were doing this, and he said, "Son, one day they will take the silver out of our money in the same manner that that son-of-a-bitch Roosevelt did with our gold in 1933" Six years later Gramps was proven to be correct.

By age twelve, he began to take me to coin auctions and estate sales, whereupon I began to purchase a few small, moderate gold coins. As you may recall, few people were allowed to own gold back then - other than in the form of jewelry or coin collections. Many who owned gold coins were still scared to death of the ghost of FDR and his gold-grabbing cohorts - but true coin collectors knew what the rules were and what they could legally own. It was those people, who my grandfather introduced me to - and I have been a collector of specie since that day. Yes, all these years later, I still go to auctions and still purchase collector AND investor grade coins - in gold, silver, nickel and copper. Some I purchase for the same reason you seem to be considering - investment - not so much for myself any longer - but for my granddaughters. It never dawned on me until I was 42, that one could actually make a comfortable living providing both investment grade coins and security to desiring clients and collectors - and 16 years later I am still doing it.

Many of the folks, who you will talk to in this "industry" have been doing it for three years or less - and they are still "selling" you what their bosses want you to buy - a bill of goods. They are all hopping on the bull-market-in-gold train and that is all they know. Enough on that topic.

Consider the following: When building a home, where do you begin? Do you get a bunch of friends to come over on a Saturday afternoon to "raise the barn?" Do you start by putting up the walls first, then the trusses and roof sheathing, etc.? "Oops, baby. We have to have everyone back next Saturday to pour the foundation!" Consider the purchase of gold and silver much like building that new home - you begin with the foundation - 90% junk silver, 1 oz. silver rounds, small, fractional gold coins - all of which could be used for barter and trade. Once you have that "first bag" put together - then - and ONLY then, do you want to consider filling your "second bag" with quality, investment grade coins (IGC's).

The Rules of Thumb: There is an old adage, which says, "You buy silver to sell and gold to hold." In simple terms, it means that you sell silver when it has made you a killing of a profit (which it will soon do) or when you need to put a bag of groceries on the table (gallon of milk, loaf of bread and a package of hot-dogs). Like your checking account - it is to be used for your "daily loaf of bread." But gold? You buy it to hold onto - much for the reasons of which you have approached me - until you just can't raise enough cash to replace the roof or pay the taxes. Gold should be used like a savings account - a security blanket. Can you eat it? No - but forthousands of years throughout the world - gold (and by extension, silver) can in many cases be used for "barter" or converted into the local currency of choice.

Allow me to address the "financial crisis" portion of your note: It's quite simple, contrary to what you may have been told (and I can fairly well guess by whom) during a financial crisis or collapse of the U.S. Dollar - NO ONE IS GOING TO CARE THAT YOU OWN AN MS-ANYTHING. When our system gets to the point of financial Armageddon - and ALL fiat systems do - all anyone will care about is the weight of the gold - or silver. Rarity and grade will become valueless!!! The only people who will want it will be the robber-barons, who are left - and they'll want to steal it at cents-on-the-dollar.

A Modern Horror Story: Recently, I had a gentleman contact me from Texas, who in the year 2000 came to a personal decision that he wanted to diversify his investments into gold. He set out to find a dealer who would provide the basic, simple "ounces of gold" that he felt would fit his needs. Because of an ad he had heard on the radio, he contacted a "Rare" Coin firm in New Jersey, who smoothly convinced this gentleman to purchase a selection of certified (slabbed) "rare" coins, promising him untold multiples of profit in the few short years to come. The profits never came - even though he had been told that "when gold doubles in value, these rare coins traditionally have tripled or quadrupled in value." Since 2000 gold has MORE than doubled in value - and yet the value of his "rarites" had declined by over 52% - in part because he had purchased common-date, generic coins at industry standard overinflated prices (estimated 40% markup). His $19,000 investment brought no more than $9,052.00 in October of 2005 - and yet - if he had only placed his original investment into common bullion coins (American Eagles or Canadian maple Leafs) or even pre-1933 British Sovereigns (genuine "coin of the realm") - his holdings today would be valued at approximately $38,000.

In late November of 2005, my new client has started over and is on his way to recovering the losses of an ill-advised "investment" - and the barter or exchanging of a quarter ounce of gold will be much easier than swapping an MS-65 common-date Double Eagle for a Double Cheesburger at Mickey D's.

Fini: I believe that the first thing that I can help you do (after your homework) will be to assist you in determining exactly what it is that you and your wife are attempting to accomplish. It will be from that point, that we can determine the wisest path for your "portfolio" - and I DO hate that word.

As to your final question, at our firm, the acceptable forms of payment are personal check or bank-wire transfer. The credit card companies are making too much of your information available to those who don't need to know - and besides - they charge us 3% on the gross sale. In order to keep our prices down, we can ill afford to absorb this expense.

As I intimated at the outset, this would be a lengthy response and yet I hope that it has been helpful. I am by no means attempting to sway you away from your initial direction, but by education, attempting to help you redirect your thoughts on the issue. I would happy to assist you in these endeavors and be proud to serve you and your family for years to come.

Without apology I am,

Afterword: Jeffrey Bennett is the Editor/Publisher of The Federal Observer and has been a purveyor of gold and silver bullion and numismatic antiquities for sixteen years and is President of Kettle Moraine, Ltd.. He may reached by telephone by calling 1-623-327-1778 or via email at jeff@federalobserver.com to arrange a no-obligation consultation.