Gold Confiscation: Why Rare Coins?
Investors in the U.S. stock market have lost more than $9 trillion since its peak a year ago. The unwinding of leverage by hedge funds and other institutional investors that has slammed both financial assets and commodities is crushing markets around the world.
Since 2002, we've been telling our clients that the price of gold was going up – a lot. We believe that the current bull market will end only when gold surpasses its 1980 high of $850. In today's dollars, that would mean a price of more than $2000 per ounce! We've still got a long way to go.
However, gold shouldn't be the beginning and the end of your hard-asset portfolio. Just as you diversified your portfolios of financial assets by buying gold, so should you own other tangible assets that increase your opportunity for profit at the same time that they reduce volatility.
Professor Harry Markowitz, a Nobel Prize winner and the father of modern portfolio theory, defined the concept of the Defensive Asset Class. Assets within the class have similar risk/return characteristics, are positively correlated with each other and are traditional inflation hedges that are negatively correlated to stocks – they do well when stocks do poorly. Historically, the principal Defensive Asset has been gold. However, a recent study, which was originally done for the Joint Committee on Taxation of the House and Senate, showed that U.S. rare coins were a better hedge than gold and produced better
investment returns.
That study, updated through 2007, provides a comparison of the performance of gold and gold rare coins. Conducted by Raymond E. Lombra, Professor of Economics at Penn State, the study served as the investment basis for legislation that was passed by Congress and which provided for the inclusion of gold in Individual Retirement Accounts. The conclusions over the 28-year period covered by the Lombra Report are amazing:
- Rare coins are a better inflation hedge than gold.
- Rare coins are a better hedge than gold against falling prices for stocks and bonds.
- Rare coins produce significant profits even during periods when the price of gold is falling. For example, from 1988-1990, rare coins went up more than 100%; the price of gold fell from $500 to $360.
- The average annual return on rare coins was more than 200% greater than the return on gold.
- The return on rare coins in their best year was approximately 100% greater than the return on gold in its best year.
- The return on rare coins in their best three years was approximately 100% greater than the return on gold in its best three years.
In 2008, rare coins outperformed the stock market and gold during a year of severe economic turmoil:
Investment studies have shown that rare coins of true quality and rarity, properly priced and selected, can be excellent long-term investments. Rare coins have historically offered the opportunity for both substantial capital appreciation and asset protection during inflationary cycles and periods of economic disruption. For example, some years ago, the Chairman and Chief Executive Officer of Fidelity Investments, was one of the principal investors in a partnership that invested in rare U.S. coins. The partnership was liquidated approximately 4 years later for a profit of more than 500%.
But rare coins offer more than the occasional windfall profit. A study by the Chief Investment Officer for GE Private Asset Management, Inc. concluded that rare coin returns have been highly attractive over the last sixty-two years, and that even a small allocation provides a good diversification for a well-diversified portfolio.
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