Rare Coins Produce Higher Returns Than Gold, Despite Lag

October 9, 2007

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A study by the Chief Investment Officer for GE Private Asset Management, Inc., Robert A. Brown, Ph.D., reaches similar conclusions, finding that rare coin returns have been highly attractive over the last sixtytwo years, and that even a small allocation provides a good diversification. Relative to thirteen other popular asset categories, rare coins offer higher average annual returns with commensurate levels of volatility.

Dr. Brown pointed out that the returns from rare coins compared quite favorably to those of growth stocks over the 62-year period, with the added propensity to deliver a degree of protection during inflationary environments. He also concluded that the market for rare coins is deep, well-developed, and improving, and that it is not uncommon for high net worth individuals to already be comfortable with and have significant holdings in rare coins.

GOLD

We concur with the strategists at Citigroup, Deutsche Bank and Goldman Sachs who are among the new generation of “supercycle” proponents who believe that supply shortages and growing economies in China and India will send gold and other commodity prices higher for another 15 to 20 years. The forces that have driven gold prices higher in the past couple of years remain in place. Strong global growth, abundant liquidity, widespread supply constraints, reduced central bank sales, a persistent slump in mine production, the liberalization of gold ownership for Asian citizens, a distrust of the dollar, and a growing enthusiasm for gold from investment firms have combined to push prices dramatically higher.

Central bank sales of gold are slowing at the same time that mine production is falling. Australia and South Africa officially updated their mining production totals for the first quarter of 2007, and the results were startling. Prices have nearly tripled in the last five years, but production is actually declining in the #1 and #2 producing countries in the world. Given the fact that powerful forces are limiting the growth in output, still higher prices will be required to keep supply and demand in balance.

Demand is rising. Worldwide investment demand for gold will remain at historically high levels this year, significantly exceeding 40 million ounces. The gold market continues to enjoy robust physical demand combined with fund-led speculative activity, particularly during periods of dollar weakness. The flight from the dollar is picking up speed and momentum. The euro is not the only natural alternative to the dollar. There is another alternative, the world’s most enduring form of money - gold.

Don’t rule out the possibility of a full-blooded mania in gold within the next couple of years, particularly given the fact that returns from financial assets are expected to be modest from current levels.

However, gold shouldn’t be the beginning and the end of your hard-asset portfolio. Just as you diversified your portfolio of financial assets by buying gold, so should you own other tangible assets that increase the opportunity for profit at the same time that they reduce volatility.

RARE COINS

The factors that influence the rare coin market have become overwhelmingly bullish. Most importantly, the price of gold has gone up more than $400 since 2002. As we said earlier, when gold goes up, rare coins follow, often with a significant lag. Today, rare coins have lagged behind gold for three of the past four years. However, if history is any guide, sometime soon we can expect the rare coin market to take off and to far exceed the performance of the gold market.

The distribution of information about rare coins has been facilitated by the Internet, and sophisticated investors are increasingly looking for assets outside of the U.S. stock market, which many market observers expect to post only modest gains during the coming years.

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