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Rare Coins and Inflation
April 9, 2008
Increasingly, investors are becoming concerned about inflation. Rising commodity prices and the falling dollar point to price pressures ahead and, with global growth still robust, the link between domestic output and domestic inflation may be waning.
Soaring prices for oil, food and other commodities, a weak dollar and rapid monetary growth all seem reminiscent of the 1970s, a time when inflation was rampant throughout the global economy. In the meantime, the Federal Reserve Board has moved into panic mode, taking increasingly desperate measures to stimulate the economy. The Fed’s current round of aggressive monetary stimulus is driving the dollar lower at a time when there’s lots of global liquidity in place. What’s more, as long as the credit market remains dysfunctional, the Fed can be counted on to pour liquidity into the system, and the dollar will continue to fall.
The result of all of this is clearly inflationary: the latest median inflation rates for 44 developed and emerging countries is now 5.1% compared to 2.7% a year ago. Here in the United States, just in the past four months, Merrill Lynch economists have ratcheted up their 2008 global inflation expectations from 3.4% to 4.2% (far outside the Fed targets).
The Economist recently said something remarkable about the dollar:
“The darkest scenario – that investors panic at the Fed’s loose policy, sending the dollar into a free-fall, is becoming worryingly plausible.” (The Economist, March 22, 2008)
As investors concerns about inflation become more acute, they increasingly turn to inflation hedges such as gold. However, some sophisticated investors realize that, historically, rare coins have been a much better hedge against inflation than gold has been – twice as good, in fact.
“The correlation of the return on coins with inflation over the last 29 years is well above that of other assets considered, and nearly two times that of gold; thus, the contention that gold is a better hedge against inflation than rare coins is not supported by the data.” (The Investment Performance of Rare U.S. Coins” by Raymond E. Lombra, Ph.D., an independent study of the investment performance of rare U.S. coins for the period January 1979 through December 2007. This study updates and extends an earlier study which was prepared for the Joint Committee on Taxation of the U.S. House and Senate.)
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Copyright © 2009 Blanchard and Company, Inc.
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