Investors Flock to Coins

by Jeff D. Opdyke Staff Reporter of THE WALL STREET JOURNAL

Rare coins are starting to attract investors more at home with stock brokers than coin dealers.

The interest in coins comes as sophisticated investors are increasingly looking for assets outside of the U.S. stock market, which many market observers expect to post only modest gains during the coming year. In buying rare coins, individuals not only acquire a collectible asset, but they are also getting exposure to precious metals. The prices of gold and silver, from which many popular U.S. coins are made, are both rising smartly.

The Internet and coin-grading services are playing a part in drawing a new breed of coin investors. The Internet allows collectors to buy and sell rare coins at locations other than their local coin shops. The grading services authenticate coins and grade them based upon how closely they resemble a freshly minted coin, making it easier to certify that the coins being traded are investment grade. And electronic registry services that have sprung up on the Internet during the past few years let investors register their collections online and compete against others in building the highest graded, most valuable sets.

All this has helped make investment-grade coins nearly as liquid as the stock market. The coin market even has its own index -- the CU3000 Rare Coin Index. During the past year, that index of the 3000 most-actively traded coins, has gained about 7.5%, while the Standard & Poor's 500-stock index is up about 11.5%. In the past three years, the coin index has gained more than 18%, far outpacing the S&P, though coins are off by about two-thirds from their high in 1989.

The coin market presents risks. Novice collectors often get burned, despite the Internet and grading services. Moreover, many smaller shops are popular but can undercut sellers and overcharge buyers, some dealers and collectors say. And the precious-metals market is notoriously volatile.

Also, coin prices have moved substantially, meaning investors aren't buying at bargain levels any more. Still, coin experts say, coins are about two years into a bull-market that, if it mimics history, will last four or five years.

"There is a lot of smart money going into coins right now because the wealthy individuals see very attractive valuations," says Mark Salzberg, chairman of Sarasota, Fla.,-based Numismatic Guaranty Corp. of America, or NGC, a firm that grades and certifies the authenticity of coins. These are individuals "who have the money to come in and buy the ultra-rarities."

In addition to the lackluster outlook for stocks, the weak U.S. currency is also driving people to hard assets that aren't tied to the dollar. "The dollar is decaying right before our eyes and people want to own those assets not directly tied to the dollar, hard assets," says Geoffrey Hodes, a vice president at Monex, a Newport Beach, Calif., precious-metals trading firm.

And while gold and silver bullion are less expensive per ounce than coins, "bullion is not beautiful or sexy to look at and there's no story behind," he adds. "Rare coins have all that. It's like collecting art."

An ultrarare 1933 Saint-Gaudens-type gold coin -- one of only a few that still exist since most were melted down after President Franklin D. Roosevelt outlawed the hoarding of gold -- sold for nearly $7.6 million, including fees, at auction two years ago. And in August, at the American Numismatic Association's annual World's Fair of Money, a rare, 1792 copper cent -- found in an old tobacco tin -- was valued at $400,000 and is expected to fetch more at auction.

Wealthy investors are gravitating toward the most popular and liquid investment coins: the $20 Double Eagles and Saint-Gaudens, each comprising nearly an ounce of gold; Morgan and Peace dollars pressed from slightly more than three-quarters of an ounce of silver; and Liberty Walking half-dollars that hold about a third of an ounce of silver.

Those coins, depending on preservation, rarity and other factors, range from a few hundred dollars to hundreds of thousands of dollars. In general, investors are building high-quality, investment-grade portfolios of various gold and silver coins for between $2,000 and $10,000 per coin -- up from just several hundred to a few thousand dollars a couple years ago. Unlike gold and silver, which investors often own only in paper form, investors hold coins directly, if only to be able to appreciate them as artwork-caliber engravings.

At auction firm Spectrum Numismatics, a unit of Greg Manning Auctions Inc. in West Caldwell, N.J., wealthy retail investors are making up a larger portion of the business these days. Through various subsidiaries, Spectrum holds upward of 130 auctions a year -- from high-end affairs hawking coins that fetch $250,000 or more, to low-end Internet auctions where coins sell for a few hundred dollars.

"People buying these days often have the intent to sell some day," says Greg Roberts, president and chief executive officer. To them, he says, "coins have become an alternative hard asset."

The discovery last year of the S.S. Republic also is piquing investor interest. The Civil War-era steamer, carrying $400,000 in gold and silver coins, sunk in a hurricane off the coast of Georgia on its way to New Orleans, and numerous high-grade coins being pulled from that wreckage are selling for tens of thousands of dollars.

Coin dealers are mainly guiding deep-pocketed investors interested in collecting. Established dealers not only locate worthwhile coins around the country, but also they can help build investment-caliber collections and design profitable exit strategies for selling off the collection. To find a dealer, the American Numismatic Association's Web site, www.money.org, has links to what it considers to be reputable ones.

Investors generally demand coins be graded independently to ensure authenticity and to determine a coin's mint state, or how closely it resembles a freshly minted coin. Coins are graded on a scale of one to 70, with 70 being perfect. Investment-grade coins typically start at MS65 (MS stands for "mint state"), though with some particularly rare or historically significant coins, lower grades are acceptable. Graded coins are locked in sealed, tamper-resistant plastic holders, what the industry refers to as "slabs."

Not all slabbed coins are equal, though. Grading services vary in their quality, and "that's where new investors typically get burned," says Barry Stuppler, a rare-coin dealer and president of the California Coin and Bullion Merchants Association. Investors looking for bargains often jump at seemingly high-grade coins graded by low-tier firms. But they end up overpaying for what turns out to be an inferior coin, Mr. Stuppler says.

The most subtle scratch or flaw can drop a coin into a lower grade and result in a big difference in value. With an 1891 Morgan silver dollar minted in Carson City, Nev., for instance, a very narrow grade shift of MS67 to MS66 changes the value of that coin by about $25,000, according to Professional Coin Grading Service, or PCGS, in Newport Beach, Calif.

PCGS and NGC are widely praised, and coins graded and slabbed by these two grading services routinely trade just on the basis of their reputations. Independent Coin Grading Co., or ICG, and ANACS are gaining respect but still lack wide acceptance. The other services, according to coin-dealer surveys, collectors and independent industry experts, are widely dismissed as too liberal with their standards, and the coins they grade are generally deeply discounted to account for grade inflation.

Of course, you don't have to be rich to invest in coins. In fact, the lower end of the market is booming, too. For instance, Jefferson nickels minted in Denver in 1938 -- the first year the U.S. Mint released that series -- have been hot for the past year, and today the most immaculate examples of those five-cent pieces fetch upward of $2,000 each, according to PCGS, which also produces a much-watched price guide for collectible coins.

Write to Jeff D. Opdyke at jeff.opdyke@wsj.com