Photo Credit: PCGS
In today’s age of serial asset bubbles, it is easy to believe that financial history began in the late 1990s. But this is not the case. Few investors know this, but the U.S. rare coin market experienced a truly gargantuan certified coin bubble in the late 1980s.
I had my own, personal experience with this certified coin bubble. In the late 1980s, I was subscribed to COINage magazine, a nationally distributed industry periodical. Among its pages I found an advertisement for a coin I desperately wanted – an 1872 U.S. three-cent nickel that was certified MS-62 by PCGS. This eccentric coin was available for the princely sum of $795, an amount that a 13 year old boy in 1989 could never hope to afford. In the end, that was probably for the best.
The U.S. mint struck the three-cent nickel from 1865 to 1889. This small, odd-denomination coin was a reaction to a shortage of small change that arose during the U.S. Civil War. During the war, the U.S. government issued “shinplasters” – cheaply-made, legal tender fractional notes meant to temporarily satisfy demand for low denomination cash. Once the war ended, the U.S. mint flooded the economy with small-denomination coins to replace the hated shinplasters. The three-cent nickel was one of these new, post-Civil War denominations.
The three-cent nickel that I badly coveted wasn’t in a particularly high condition. MS-62, otherwise known as Mint State-62, is much closer to the lowest mint-state grade of MS-60 than the perfection of MS-70. An MS-64 or MS-65 example really would have been much better (and more expensive). But a mitigating factor was that 1872 was a somewhat less common date for the three-cent nickel series. The mintage was only 862,000 versus 11 million plus for the most common date in the series.
MS-64 & MS65 Certified U.S. Three Cent Nickels for Sale on eBay
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That scarcity didn’t stop the coin from plummeting in value when the certified coin bubble burst. Even today, nearly 30 years later, you can still buy a slabbed MS-62 three-cent nickel for only $200. That is a stunningly high cumulative loss of nearly 75%. If you measure the decline in inflation-adjusted terms, the situation is even worse, with a loss of over 88%!
There were several root causes of the massive certified coin bubble of the late 1980s. First, memories of the 1970s and its dreaded inflation still lingered in the minds of many investors. In early 1987 the price of silver spiked to more than $10 a troy ounce, almost double its normal price at the time. Many people thought inflation might be making a comeback and rare coins seemed to be the perfect way to hedge this risk.
Another contributing factor to the late 1980s certified coin bubble was the 1987 stock market crash, widely known as Black Monday. On October 19th 1987, the Dow Jones Industrial Average collapsed by 22.61%. It was the largest one day percentage loss in the index’s history. Even though the resulting bear market in stocks was over within a few months, many disillusioned equity investors looked for alternative investments. Numismatically valuable U.S. coins seemed to offer a good substitute to the treacherous stock market.
But the most important factor in the certified coin bubble was undoubtedly the development of slabbing itself. Third-party certification was an attempt to impose grading standards on an industry that was famous for its inconsistency. In 1985, PCGS became the first third-party coin grading company. PCGS found immediate success in the numismatic industry and soon spawned a close competitor, NGC, in 1987.
MS-65 & MS66 Certified U.S. Morgan Silver Dollars for Sale on eBay
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The advent of independent, third-party certification had a seismic impact on the rare coin industry. Before slabbing, numismatics was overrun with fly-by-night companies and boiler-room operations that sold severely over-priced, grade-inflated coins as investments to unsuspecting consumers. The arrival of PCGS and NGC changed the industry nearly overnight. Now dealers, collectors and investors could buy or sell slabbed coins “sight unseen” because they all trusted the grades given by the major grading services.
This situation is typical of all great bubbles. A legitimate innovation or discovery takes place that promises the future creation of tremendous wealth. In this case, the certified coin bubble was driven by the almost religious belief that slabbing would transform the numismatic market. It was widely thought that certified coins would enjoy greatly improved liquidity generated via massive institutional demand from financial firms. Proponents at the time felt these factors justified perpetually rising rare coin prices.
As the late 1980s unfolded, the enthusiasm for slabbed coins reached a fevered pitch. As with so many other bubbles, it didn’t take long for Wall Street to join the certified coin bubble. In February 1989 the respected financial firm of Kidder, Peabody & Co. started a limited partnership, the American Rare Coin Fund. A year later Merrill Lynch launched a similar fund called the NFA World Coin Fund Limited Partnership. UBS, another Wall Street firm, created an internal rare coin division dedicated to advising its high net worth clients on numismatics. The potential for certified coins seemed almost limitless at the time.
MS-64 & MS65 Certified U.S. Liberty Head $5 Gold Coins for Sale on eBay
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And then it all came crashing down. The U.S. certified coin bubble peaked sometime in mid 1989 and slowly – almost imperceptibly at first – began to weaken. By late 1989 some categories of high-grade, common date coins, like Morgan silver dollars, were clearly in decline. But the real, gut-wrenching carnage didn’t hit numismatic dealers and coin shows until the 1990 – 1991 timeframe.
The PCGS3000 Index, a key indicator of the rare U.S. coin market, peaked at $181,088 in May 1989. The index bottomed out in December 1994 at $46,819 – a vicious 74% loss. Even now in January 2018, the PCGS3000 index rests at $57,076 – a loss of more than 68% since the 1989 peak.
I think it is important to learn the right lessons from the late 1980s certified coin bubble. It isn’t that tangibles are bad investments – far from it, in fact. I think that tangible assets are, generally speaking, great buys at the moment. After all, some high-grade, certified U.S. coins are available today for the exact same prices they sold for in the mid 1980s!
Instead, you should be wary of any asset class that is over-hyped by the financial media and Wall Street. Avoid investing in that hot stock or index fund that all your friends, co-workers or relatives can’t stop talking about. Right now these dangerously overvalued assets include high-flying tech stocks, like Netflix, Amazon and Tesla, along with virtual crypto-currencies like Bitcoin. Ironically, some certified U.S. rare coins are a great investment at today’s prices; it just took nearly 30 years to get there.
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