ITEM: Some time ago I received in the mail a brochure suggesting that I buy as an investment a set of Choice Brilliant Uncirculated (BU) Roosevelt Silver dimes. The brochure, from a well-known firm, was nicely, even elegantly printed. It listed the reasons for investment in BU dimes: growing collector interest, good silver value, etc. All very sensible reasons. The brochure offered the set at $125.00.
That was the problem. At that time, a set of BU Silver Roosevelts wholesaled at about $55 to $60. The firm was asking more than twice the wholesale price! To break even on such an investment, one would have to wait for the price of such sets to double.
ITEM: Last summer I was consulted by an investigator for the Michigan Attorney General about a coin dealer who had been selling gold coins and silver bullion to local investors. The coin dealer had a long history of securities fraud before entering the coin business. The investigator showed me some invoices from the dealer, and wanted to know the wholesale price of the various coins on the date in question. I checked my records. The result: the firm had been charging from 64 to 112 percent markups on common bullion items! The transactions involved literally thousands of dollars. In some cases over half of the investment was profit to the firm.
ITEM: In 1973, a large gold and silver coin dealer in the Southwest went bankrupt. At the time, the firm owed its customers thousands of dollars worth of coins. The customers have not been paid; the firm's president has fled the country.
ITEM: A well-known dealer boasted in private, "My customers trust me. If I told them that silver sells for $7,000 per bag, they'd still buy from me and pay me that price."
ITEM: On March 23, 1976, word went out on one of the national coin dealer teletype dealer networks that a very large gold and silver retailer from Texas was no longer doing business and that there was "reason to believe it may be in receivership." Their customers were left holding the bag.
ITEM: During the first three months of 1977, three more precious metals firms have apparently gone bankrupt. All three had advertised heavily in the nation's financial press; all had offered toll-free WATS line telephone service to their customers. And all went under with customer orders still pending, costing their clients thousands of dollars.
Investment in coins is practically an article of faith for most libertarians—both rare coins and bullion coin investments. A recent survey showed that 45.7 percent of REASON's readers invest in gold or silver.
Precious metals and rare coins offer real advantages to the investor concerned with inflation. Unfortunately, through lack of understanding of the market and how it operates, many who invest in these markets fail to profit not because they make incorrect market prognostications, but because they invest with unreliable firms.
Precious metals and rare coins are somewhat esoteric investments. They require special knowledge. The markets for both are rather primitively organized (at least when compared to the organized stock and commodity exchanges), consisting mostly of independent dealers. There is no readily available, easy comprehensible publication of price data on coins. As a consequence many investors pay substantially more for the exact same coin as other investors who have different dealers.
In addition, a number of dealers are unscrupulous, some bordering on outright fraud. Some dealers charge double (or even more) the wholesale price of investment coins, operating on the knowledge that their clientele will lack either the means or the inclination to compare prices.
Happily, the intelligent investor is not without hope. Operating with common sense and intelligence, the investor can enter the market with reasonable safety.
The precious metals market is not very complex or hard to understand. It consists of a substantial number of coin dealers around the country who buy and sell coins for a profit. The larger and more reliable firms are mostly members of one of two national teletype networks, over which they buy and sell gold and silver coin. Some are members of both. Most basically sell coins to their clients at a price somewhat over the wholesale cost. (The wholesale price is the price at which coins are available on a dealer-to-dealer basis.)
The markup is usually in the one to five percent range. Most reputable dealers can live and indeed prosper on this margin. But some dealers on the fringe of the precious metals business charge substantially higher commissions—in the range from 10 to 100 percent or more. These firms are usually not members of the national teletype circuits: they buy their coins from dealers who are members.
The reason that firms changing such high prices are not driven from business by their competition is simple: many investors do not comparison shop at all. Many are content to take their dealer at his word.
This is particularly true in cases where an ideological rapport has been established. Many dealers publish newsletters, or market letters, which offer advice on buying coins. This advice is often couched in libertarian terminology, which serves to establish a bond of trust between the client and the firm.
The way to protect yourself against those with giant commissions is simple and common-sensical: comparison shop. Call your local dealer for quotes. Call the dealers who advertise in various libertarian and conservative journals. Call the dealers who advertise in various coin magazines and coin newspapers.
Remember, phone calls for quotes are cheap. The 50 cents or less for each one-minute phone call is peanuts compared to the amount you can be over-charged. An extra five percent markup on a $1,000 deal is $50.
Talk to acquaintances who have purchased coins. Find out whom they recommend. Get as much information from as many sources as possible as you can.
Checking out the financial responsibility of a firm is somewhat more difficult. Bank references are helpful, but their value is limited. But check them out. Call the bank and talk to an officer familiar with the firm.
One good indicator of the financial ability of a firm is its delivery time. Firms that are on the brink of failure tend to make slow deliveries. By delivering slowly, the firm can use one customer's money to finance the purchase of coins for another customer. In this manner it can stave off bankruptcy for a little while.
There are occasions when even a reliable dealer will not have immediate delivery on all the coins he offers. Perhaps the internationally available supply of a given coin is temporarily depleted. But any reputable dealer should be able to offer immediate delivery of most gold and silver coins. If he says delivery of Krugerrands is slow, ask about delivery time on other coins, perhaps Austrian 100 Corona or British Sovereigns or U.S. silver coins. If delivery is not immediate on most coins, choose another dealer. There is a good chance the dealer is not financially strong.
(When you ask about delivery, be sure to specify that you are willing to pay via bank draft or bank wire. It is normal business procedure for a dealer to refuse shipment until your personal check has cleared. It is usually wise to make payment via bank draft or wire for other reasons anyway; it is relatively more anonymous and much more expeditious.)
You might also ask his competitors. This is risky: there is always the strong chance that his competitor may give him a bad credit report in order to encourage you to do business with them instead.
Also observe how a firm operates. If its salesmen call you soliciting business it is likely that they are paid good commissions, which means the firm is quite expensive, and saddled with more overhead. See how widely they advertise: another sign of excessive overhead. (Widespread advertising should not be construed as a sign of credit-worthiness: the two large firms mentioned at the beginning of this article were both substantial national advertisers, and both advertised heavily right up to their bankruptcy.)
Two other points are important in selecting the right coin dealer. First, check out the dealer you choose from time to time. Some dealers change their pricing policy. Some have even been known to charge higher commissions to established clients, on the theory that established clients are less likely to comparison shop. Secondly, do not accept price quotes in advertisements without question. One large coin firm for some reason has put much lower prices in its ads in the Wall Street Journal than it actually quotes on the phone.
Of course, I am not suggesting that price and financial responsibility should be the only criteria in choosing a dealer. If you believe that other factors are important—such as a nicely printed newsletter, or personal or ideological rapport—take them into consideration. But be sure to take the price/reliability factors into consideration as well.
Remember, the coins you get are the same regardless of dealer. A Krugerrand is a Krugerrand—whether you pay 150 or 15 or 1½ percent over the wholesale price for it. A bag of silver is a bag of silver—whether it costs you $3,000 or $4,000.
And all it takes to establish a precious metals business is a mailing address, a telephone, and a few dollars for the printing of business cards, letterheads and newsletters. And that's all some firms have.
Rare coins are becoming an increasingly popular investment among libertarians. The major factor in their increasing popularity is the extremely heavy promotion of them as investments. The reason for this heavy promotion is not hard to fathom: the typical markup in rare coins is much higher than that on bullion type coins. Typical dealer mark-up on rare coins is at least 20 percent. But many dealers mark up coins much, much more—often as much as 100 percent or more.
Dealer margin on rare coins is higher than on bullion coins simply because dealing in rare coins requires more work and more knowledge than dealing in bullion coins. The purchase of gold or silver for resale by the dealers is no more difficult than picking up the telephone or putting a message on telex or teletype. But the purchase and sale of rare coins requires considerable expertise. The dealer must be able to grade, authenticate, and accurately describe and attribute the coin. He must build up contacts, often at great expense and over a number of years.
Unfortunately, there are firms who find shortcuts. They mark up coins remarkably, often over 100 percent. While they describe the coins they sell as "rarities", most of the coins are actually quite common. Like their cousins in the bullion business, they are dependent on the credulity of their clientele.
Traditionally, the quick-buck artist in the rare coin business has made his money by misrepresenting the grade of his coins. If a coin of a given date and denomination sells for $200 in fine condition and $350 in very fine, the unscrupulous dealer simply buys a fine coin and sells it as a very fine, pocketing the difference.
There are dealers who openly advertise on the teletype circuits that they want to buy Choice About Uncirculated (or "slider") coins, and who advertise in coin publications the same coins as "Brilliant Uncirculated at discount prices."
But over the past few years, the problem of over-grading has become so widely known that dealers have developed a new tack: overpricing. They simply price coins at two or three times the value of the coins. One firm typically sells its customers Extremely Fine large cents at $50. Wholesale value is only $25. The firm selling the BU Roosevelt dime set mentioned above is another example.
Firms systematically overpricing their coins often offer special evidence of their honesty: a guarantee of correct grading. But the guarantee protects the investor only against over-grading, leaving him wide open to overpricing.
(Of course, I am not suggesting that a markup of 100 percent or so is immoral or should be illegal. I am only suggesting that such a markup takes the item out of the category of investments. If one's break-even point on an investment is double the current market, it ceases to be an investment.)
Unfortunately, there is no simple way to determine whether you are being overcharged. For the most part, the rare coin market is specialized to the point that not many people know the market value of a given coin.
To invest wisely in rare coins (this goes for rare stamps also) one must either have explicit trust in an advisor (a dangerous process) or know the market. But do not put much hope in finding an expert advisor whom you can trust. It is theoretically possible that someone could help you with his expertise and then sell you coins at reasonable prices—but it would certainly be unusual. The normal pattern is for the dealer to impress you with his knowledge, sound you out to see just how knowledgeable you are, and then charge you prices commensurate with your trust of him and his estimation of your degree of ignorance.
The only real protection for the investor in rare coins is to get to know the market. Get to know the values of various rare coins. Subscribe to and read auction catalogs and lists of prices realized. Subscribe to and read numismatic periodicals. Attend major coin conventions and get to know the major dealers in the type of coin that interests you. Read what scholarly works are available on the coins you invest in.
If all this sounds like a lot of work, remember—it is. You are not going to get a free ride or sure investment in rare coins. Unless you are willing to work at it, you will very likely just be another sucker who gets burned. Do not invest in rare coins unless you are willing to invest the time necessary to learn about the coins in which you invest.
Investing in rare coins and precious metals does offer a good means of hedging against inflation. Under the right circumstances it can be very profitable. Precious metals also offer security to those concerned with the possibility of social or political collapse. Rare coins can offer esthetic pleasures as well. But like all human activities, what one gets out of coin investing is proportional to what one puts into it.
R.W. Bradford holds an A.B. in philosophy from Grand Valley State College and is proprietor of Liberty Coin Service in Lansing, Michigan.