I specialize in comprehensive, strategic advice to family business owners, art collectors, numismatists and other owners of significant, illiquid and unique assets.  Even if the client is not a dedicated coin collector, often times they have bought numismatic quality gold and sliver coins, after some have been sold at auction for millions.  The temptation to clients to think of their collecting of numismatics to be better than investing in bullion is strong. Although I do not hold myself out as a financial advisor, recently, a member of CEO group I belong to sent me this email that is in this vein:

 

Hi Matt,

Do you know anything about investing, buying and selling gold?  Who to deal with?  Etc.?

Charlie”

 

And here was my answer to Charlie:

 

Basically, there are two ways of investing in gold I would suggest, one is to buy a fund that holds gold directly, for example the Gold ETF (ticker symbol GLD) the other is to buy companies that mine and refine gold, such as Barrick Gold (ticker symbol ABX) which is a Canadian company but has mining and refining interest worldwide. 

 

                You can also buy gold coins and here you are looking at either bullion (more recent coins that are minted solely for investment purposes and not to be circulated) or numismatics (older coins and coins minted to be circulated).  This is much more risky, since tangible gold coins are not liquid and you need someone to help buy and sell the coins, as the retail dealers will overcharge you on buying, and under pay you an selling, the coins as they are usually catering to the collector, rather than the investor. 

 

            As to who you invest directly in either bullion or numismatics through, I have several contacts, but I do this in the form of an investment fund rather than individually, so that the proceeds get taxed as long term gains (15%) rather than as collectibles (28%) for Federal purposes.

 

                If you are going to buy precious metals funds, however, some have suggested buying Platinum ETFs rather than Gold ETFs at the moment (2/23/2011), since Gold is trading for $1,460 a troy ounce and Platinum is trading for $1,784 per troy ounce, and historically whenever the price of platinum is within $200 to $300 of gold per ounce, it means that gold is overpriced and platinum is underpriced.  One Platinum ETF is PPLT.  They also look for silver to outperform gold over the next two years.

This is old hat for most financial advisors.  Investing in EFTs and gold mining stocks has been a good diversity move for a long time.  But what about these outsized returns you hear about for numismatics?  When an ounce of gold selling for millions of dollars just because of the rarity of the coin, doesn’t mean that would be a better investment than just investing in bullion?

Maybe not.

I collect numismatics, with help, for myself (ancient and classical coins) and as the Trustee of the Kittredge Numismatic Foundation www.kittredgecollection.org (Early Modern European crowns and Thalers). My strategy is to buy “raw” coins out of estates or collections I am not advising, getting them graded and slabbed, and holding the key date coins for investments. The key date is the coin with the lowest mintage for a given series. These coins with extremely low mintages and sell at premium because they are very difficult to locate in any grade. In some cases, the key date coin will be an error coin. A particular mint error may have obtained such notoriety that collectors do not consider the coin necessary to complete their set.

The two most famous examples of U.S. Key Date coins are the 1955 Double Die Lincoln Cent and the 1937-D Three Legged Buffalo Nickel. Most recent key dates have been special collectible coins issued by the mint which had limited distribution or a low authorized mintage. A perfect example is the scarce 1995-W American Silver Eagle. Because these coins were only distributed as part of an expensive Proof Gold Eagle Set, very few of the coins were minted, creating a new modern rarity.

Now consider the actual auctions results of a gold coin, a 1925 $20 St. Gauden “Double Eagle” from 2000 to 2010.  The coin is the some one ounce of gold, but the price for this coin grew from hammer price in October of 2001 of $402,500 to a high of $1,897,500 in November of 2005, and then fell back to $1,495,000 in January of 2010.

Source: http://www.pcgscoinfacts.com/

The one ounce 1927-D double eagle has netted the collector over $1,000,000 in between 2000 and 2010 while the one ounce of gold bullion only netted $1,128 over the same period of time. Does that not mean that the double eagle was a better investment?  Not really.  The IRR for the double eagle was 15.703% over that ten year period, while the IRR for the bullion was 17.412%.  Clearly the bullion is the better investment.

 

There are also risks when a significant of the estate is in the physical form of gold coins, whether bullion or numismatics.  Since they are tangible property, they are treated differently than liquid assets both for income and estate tax purposes.  For example, gold, art and other tangible assets may not be used to fund certain types of trust, such as some marital deduction trust, charitable trusts under many circumstances.  Also, since they are illiquid, there can be significant premiums or commissions on the sale of the gold or other tangible assets, sometimes as high as 25% of the sale price.  Finally, the specialized knowledge of the nature and scope of the market that the owner has may not be shared by their survivors, so leaving them open to having the tangible assets, such as numismatics, sold to a dealer or other buyer for a small fraction of its true value.

 

A partial checklist for handing gold bullion or numismatics in estate planning is very similar to that of any estate planning where the client has significant tangible assets, namely:

  • A current inventory of the collection, including location, cost basis and description of the item,
  • A list of all of the significant contractual relationships the owner has with dealer, auction houses and so forth and whether any of the items are on consignment for sale, to be sold at auction, or on loan or display,
  • The item featured in an article, if so then copyrights might go with the item,
  • The Personal Representative of the owner’s estate knows how to maintain and ultimately dispose of the items, or who to rely on to give a “fair” deal.
  • The items are properly and securely stored, so that valuable items do not “walk off”,
  • The gifts are very specific, wither they are to individuals or charities, and any terms of any such gifts.

If your client does not have the ready answers to these questions, then they are at risk of having the gold mishandled in the estate (as often happens with any sort of tangible property).  To avoid this, you may need to call in a specialist in handling such assets, when they are significant, or face ongoing recriminations from the client’s family.

 

Although I do not recommend numismatics as an investment (in fact I do not recommend any investments) I do recommend coin collecting as an excellent hobby and interest. If your clients are interested in owning numismatics because your client enjoys owning and collecting coins, (and is looking for decent return on their investments on the side) the best advice you may be able to give them is to associate themselves with an excellent coin dealer.

 

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