Highlights in this issue:

*** The ins and outs of rare coin collecting…
*** 4 advantages of gold coin investing…
*** The 2 vital secrets of collecting success… and more…

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From the pen of Karin Iten

Dear Investment Academy Reader,

There’s no denying that gold’s a hot topic right now. And that’s why we’re looking at the ins and outs of investing in rare and collectible gold coins this week. But before we get into the details, let’s look at the fundamentals behind the price movement of gold coins…

Like all markets (shares, commodities, currencies, commercial real estate, etc.), coin investing reacts to the price-driven internal forces of the supply / demand equation. People buy coins until prices get way too high, then they sell until prices get way too cheap. The market builds momentum going each way. These price-driven internal supply / demand forces are very powerful. Because of these internal forces, coin investing can experience a bull market even in the absence of bullish external forces.

But there are also three major external factors at play here. First, is inflation. Rare coins are a superb inflation hedge and have, in the past, always done very well in periods of increasing inflation. Next, there’s the market. Remember, coins do well when the stock market does poorly. (While it’s true that coins also do very well when the stock market does well, they never do as well when the stock market soars.) And lastly, you need to pay attention to the prices of precious metals. Fluctuations in the gold, platinum and silver price have a clear impact on the rare collectible coin market. Although things have calmed down a bit, in this relationship, bullion prices should be seen as the icing on the cake. If gold moves up, it adds fuel to the fire.

4 important advantages of coin collecting

The rare collectible coin market’s bottom-line is one of the best of all investments. Here are five important advantages of rare collectible coin investments:

#1: Liquidity
Rare coins are the most liquid of all collectibles. When the time comes to sell your coins, you can expect to receive immediate payment.

#2: Diminishing supply
This is a subtle, yet very important, coin investment advantage. The supply of collectible coins diminishes daily. Not only are they not making any more $20 Saint-Gaudens, Buffalo nickels, etc., but the available supply is constantly diminishing as a result of smelting, abuse, neglect, etc.

This means two things. First, any increase in demand makes price increases inevitable. The supply of coins can’t be increased to meet new demand. The only way new demand can be satisfied is with higher prices. Second, a limited supply reduces the downside risk. As prices come down, production gluts (as in the oil market) don’t depress prices further and hinder a price recovery.

#3: Affordability
A collectible painting can cost many millions of rands or more. Top-of-the-line art, diamonds and real estate all demand very large amounts of money for the purchase of a single item. But most coin investments are in the R10,000 to R100,000 price range. This means you can expect to participate no matter what your coin investment budget is.

#4: Favourable tax treatment
This is a seldom talked about (but significant) advantage of coin investing. According to SA Coins, South African rare coins aren’t taxable on their sale. That means there’s no CGT (capital gains tax) payable on profits when you sell. You can automatically add 20% increased performance to your coin investment, as this is the average amount of tax you’d pay on other investments. Kruger rands, however, do attract CGT.

The 2 vital secrets of rare coin investing

Secret 1: When a coin reaches its full price potential, it should be sold. This is when you can convert paper profits into real profits. Plus, you’ll become familiar with the mechanics of the selling side of the coin investing market. So learn about the selling side of the rare coin investment market because, eventually, you must sell your coins.

Secret 2: The easiest thing to do in the coin market is spend money. It’s not quite as easy to receive fair value. If you’re lucky, you’ll buy rare and collectible coins from a dealer who marks the coins up 15% to 30% above his cost. And bear in mind, many dealers mark coins up 50% to 100% above their cost.

The following coin investing tips will help soften the blow of excessive dealer mark-ups:

*** Be aware of the price you’re paying for coins.
*** Study and compare coin prices.
*** Ask for buy-backs. Find out at what price a dealer would buy his coin back.
*** Learn how to grade or get a grading guarantee that’s very specific about the buy-back process and price.

To participate in all the fabulous rare coin profits you read about, you must realise: The most guarded secret to successful coin investing is paying a fair price for properly graded coins.

Karin Iten
For the Investment Academy

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* This article was adapted from a MoneyWeek feature.