by Michael J. Kosares
Author, The ABCs of Gold Investing – How To Protect and Build Your Wealth With Gold
“Capital was preserved by those who early changed it into objects of lasting value – rare coins, stamps, jewelry, works of art, antiques – or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.” – Scientific Market Analysis, “The Nightmare German Inflation” (1970)
Inflation has become a subject of much interest in the past several weeks with many analysts predicting its return after a long absence. In a recent Bloomberg editorial (Inflation is coming thanks to Trump’s tariffs), Barry Ritholtz, the well-known financier and frequent television commentator, summed up what a good many economists are thinking.
“For a long time,” he says, “I have been in the low-inflation-for-longer camp. Changing facts, including new tariffs and an escalation of the easily winnable trade war, have caused me to rethink that position. Barring a major shift away from the Trump administration’s trade policies, higher prices in lots of things are increasingly likely in the near future.” He concludes that “the facts have changed, and therefore we should be ready to change our minds.”
Historically rare coins as a grouping have enjoyed a well-earned reputation as an inflation hedge. USAGOLD has had direct experience in that regard as we recommended this investment area during the 1970s’ inflation and the accompanying coin market boom – a strategy we suggested then as “a diversification within a diversification.” For investors looking to get a jump on a possible resurgence of inflation, we are again recommending this area of investment. This time, however, we suggest acquisitions in a narrower frame of reference – common-date, historic U.S. $20 gold pieces from the late 19th and early 20th centuries in higher states of preservation, not high-end numismatics.
This area of the gold market, in our view, offers a particularly promising opportunity at this point in time for compelling reasons.
First, historic U.S. gold coins outperformed gold during the 1970s’ runaway inflation. A $10,000 investment in gold bullion made in 1970 would have been valued at about $200,000 by 1980 while the same investment in collectible U.S. gold coins would have been valued at $350,000.
Second, these items can be purchased now at rock-bottom premiums well below their historic average. At times in the past – even at times when inflation was not a factor – premiums, have pushed the value to two and sometimes even over three-times their gold content. At present, the premium on the five-coin set pictured above is hovering near all-time lows. (See chart below)
Third, the present high gold content for these items in proportion to the overall price offers a unique advantage. In some cases, the gold value is as high as 70% to 80% of the selling price. As a result, the investor is exposed to a low-risk, double-play profit potential – an item that will rise first and foremost with the gold price and secondarily increase in value if premiums are pushed higher by an influx of new investors. The two working together would produce an ideal outcome.
Fourth, the history of this gold sector suggests the potential for strong investment performance under a variety of economic scenarios, not just inflation. As shown in the chart below, generic gold coins (the sector which includes 19th and 20th century $20 gold pieces) performed extraordinarily well during our last close encounter with runaway inflation in the 1970s (#1 and #2). It performed equally as well during the 1980s bull market (#3) based purely on a wave of speculative demand detached from any negative economic scenario. Last, it performed well during the disinflationary 2008 financial breakdown (#4). In short, even if inflation fails to materialize, this investment could come out a winner for entirely unforeseen reasons.
Chart courtesy of the Professional Coin Grading Service (PCGS)
We believe – given the recent resurgence of inflationary concerns for the American economy – that precious metals investors would be well-served by a fairly aggressive commitment to this sector of the gold market. The level of allocation depends upon several factors that should be discussed with your representative. If you have physical gold positions acquired above current prices, you might want to explore with your represesentative the benefits of a swap.
We underscore Scientific Market Analysis’ advice that “capital was preserved by those who early changed it into objects of lasting value” with special emphasis on the word early. Inflation has a history of surfacing forcefully and unexpectedly and any sudden influx of capital into this relatively thin market area could send prices higher in rapid fashion. The confluence of positive factors outlined above is unique to the present and there is no guarantee that it will remain in place for long.
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