Rare Coins Produce Higher Returns Than Gold, Despite Lag

October 9, 2007

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The focus on rare coins has been increasing ever since the U.S. mint began issuing unique quarters for each of the 50 states a few years ago. There has been a surge in interest in rare coins and the U.S. Mint estimates that there are at least 140 million Americans now collecting coins, up from 125 million just two years ago.

Finally, it is important that, here in the U.S., the very rich are getting richer and more numerous. Since the financial support for the rare coin market comes, almost without exception, from the top 1% of the population - those with over $1 million in financial assets - the status of those high-net-worth individuals, and the extent to which they are committing an ever-growing percentage of their wealth to alternative assets such as rare coins, is vital to understanding the progression of the markets.

The Review of Income and Wealth reports that “the very rich (the top 1% of American households) are in a much more secure position now then they were 20 years ago.” According to the World Wealth Report, published annually by Capgemini and Merrill Lynch, the number of high-net worth individuals grew 20% in the past five years, and alternative investments have come to account for more than 20% of these wealthy clients’ total assets, compared to less than 10% as recently as 2002. The wealthiest families in the country have seen their wealth grow at a breakneck clip over the past decade, with the income of this top 1% increasing an inflation-adjusted 54%, compared to a 12% average increase for everyone else.

“Our findings for 2006 show accelerated growth in terms of both GDP and market capitalization, the two key drivers of wealth creation. That growth led to an increase in the number of high net worth individuals (HNWIs) around the world, and an increase in the value of their assets.”

World Wealth Report 2007 by Capgemini Global Financial Services and
Merrill Lynch and Company, Inc. Global Private Client Group

The Report took a detailed look at HNWIs’ portfolio allocations in “investments of passion,” including art, wines, antiques and rare coins, and concluded that the influx of new investors, including those from emerging markets, is steadily driving up prices for these goods.

Alternative investments continue to gain popularity with individual and institutional investors because of their potentially higher returns. The mixed performance of the U.S. stock market has also enhanced the interest of investors who wish to diversify into other asset classes with different risk characteristics. Institutional investors, particularly endowment funds, have led the move to alternative investments. The Yale University Endowment, for example, has allocated a staggering 50% of its assets to alternative investments.

The Wall Street Journal just reported that Yale University’s Endowment Fund was the top performer in its class over the past two decades and is again ahead of the pack with a 28% gain for the fiscal year ended in June. Yale’s Endowment is a proponent of alternative investments. In fact it was reported that the Yale Endowment Fund “has one of the largest allocations to alternative investments and one of the best managers of alternative investments.”

Many of our clients, once they have been introduced to the advantages of investing in rare coins, have become proficient at realizing the periodic large profits that the market offers. Much of the new demand for rare coins is coming from wealthy baby-boomers, 80 million strong and now in their 60s. Already the richest generation in history, they are scheduled to inherit approximately $225 billion per year over the next decade. The immense wealth that the baby-boomers have accumulated is making diversification a prominent part of their financial plans. As more of them have become collectors, the expertise that they have developed has been put to use in making their collections a valuable, profitable part of their portfolio diversification. At the same time, their increased demand has produced higher prices, attracting more investors and collectors.

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