One of the tidbits of investment advice that you will hear again and again in the numismatic world is to only buy rare coins, particularly rare U.S. coins.  These coins, usually low mintage semi-key or key date specimens, have had an impressive track record of appreciation over the past several decades.  The underlying assumption is that any coin that has performed well in the past will continue to outperform in the future, as well.

Many rare U.S. coins have appreciated tremendously in value over the last 60 or 70 years.  Specimens that only cost $25, $50 or $100 in the 1950s now routinely trade for thousands or even tens of thousands of dollars.  A good example of this would be the 1909-S VDB Lincoln penny in AU-50 (About Uncirculated) condition.  With only 484,000 minted, the 1909-S VDB is one of the major key dates in the extensive Lincoln penny series.  In 1950, this coin would have only cost you about $10.  By 2016, this same coin was worth around $1,250 – an impressive 7.59% annual rate of appreciation over the past 66 years.

The 1916-D mercury dime is another prime illustration of this phenomenon.  Excluding overstrikes and other errors, it is the rarest coin in the mercury dime series, with a mintage of only 264,000.  In 1950, a problem-free, 1916-D mercury dime in AU-50 condition would have run about $70, versus $9,000 in 2017.  This represents a robust 7.52% annualized rate of return over the last 67 years.

So the conventional investment wisdom in rare U.S. coins is to look at the price data for a specific coin and see if it has had a consistent upward trend over the last few decades.  If it has, you are golden; the semi-key or key-date coin in question is a buy.  In contrast, if the price trend has been flat or inconsistent, then pass it by.  This advice would apply to most common-date coins.

But there is a flaw in this reasoning.  It doesn’t examine why rare U.S. coins have appreciated in value so briskly over the past several decades.  So here is my theory.

Back in the 1950s, relatively few people collected coins, so prices were low.  As the U.S. economy grew briskly over the latter half of the 20th century and the middle class became wealthier, more people began collecting U.S. coins, driving up prices.  Values increased most rapidly for semi-key date and key date coins, because these were the scarce specimens everyone needed in order to complete their Buffalo nickel, Standing Liberty quarter or Walking Liberty half dollar collections.

But as the prices of rare U.S. coins increased, they began to price average, middle-class collectors out of the market.  The 2008-2009 Great Recession was the coup de grâce for many collectors, who could no longer afford to build traditional date and mint collections for many U.S. coin series.

So if we think rare U.S. coins are going to be good investments in the future, we need to ask a couple questions.  Who is going to buy these coins in the decades to come?  And who can afford to buy these coins at prices substantially higher than they are at the present?

Let’s conduct a thought experiment to help us puzzle this out.  Imagine we have two different coins.  The first is a common date coin that costs $100.  The second is a rare date coin that costs $2,500 – 25 times what the common coin does.  Take a peek at the chart below and see what happens if we assume the common coin appreciates at an anemic 2% per annum while the rare coin compounds at a healthy 8% every year.

You’ll notice that after a century of 8% appreciation, our key-date coin would be worth almost $5.5 million versus just $724 for our common date coin!  In this case, the rare coin would be valued at almost 7,600 times the common date coin.  Attempting to inflation-adjust the price of the rare coin doesn’t help the situation much either.  Assuming 2% average inflation over our hypothetical 100 year period, our rare coin would still be priced at a flabbergasting $759,000 in current dollars!

As you can clearly see, it eventually becomes mathematically impossible for a rare coin to continuously appreciate at a rapid rate.  After all, outside of the occasional centi-millionaire or billionaire, who could afford to pay $5.5 million (or $759,000 in constant dollars) for a single key date coin?

Now there are a handful of unique or incredibly rare U.S. coins that have sold for unbelievably high prices.  An example of this is the coin shown in the photo accompanying this article – the 1933 Saint Gaudens $20 gold piece.  This ultra-rare coin was struck just as President Franklin Delano Roosevelt issued an executive order taking the U.S. off the gold standard and making private gold ownership for U.S. citizens illegal.

None of the 1933 dated U.S. double eagles had been released for circulation at the time of F.D.R.’s pronouncement and they were all supposed to have been melted down shortly afterwards.  But a handful escaped the melting pot and found their way into the shadowy underworld of high-profile stolen art.  Today, there are only 10 specimens in existence, with two of those coins permanently held at the National Numismatic Collection in the Smithsonian Institute.  The only 1933 U.S. double eagle gold coin ever legally sold brought a stunning $7.59 million at a 2002 auction.

But ultra-expensive, rare U.S. coins like the 1933 $20 gold piece are exceptions that prove the rule.  They aren’t simply key-dates or rare; they are breathtaking pieces of numismatic history.  They all have intriguing stories behind them and there are usually no more than a handful of extant specimens.  This holds true regardless of whether it is the 1794 Flowing Hair silver dollar that sold for $10 million or the 1913 Liberty Head nickel that brought $3.17 million.

The fact is that shockingly few rare U.S. coins enjoy the unique combination of history, scarcity and mythology necessary to be considered numismatic legends.  Your average semi-key date or key date rare U.S. coins, like the 1909-S VDB Lincoln Penny and the 1916-D mercury dime, will never command multi-million dollar prices (barring significant inflation).  This means you just can’t throw your money haphazardly at “rare” U.S. coins at any price and expect to see good investment results.

A lot of these key-date coins have already had great runs.  The 7% to 9% returns that many rare U.S. coins have seen over the last 60 to 70 years are not reproducible.  They have already had their time in the sun.  I cannot make predictions about near-term performance, but time is not your ally when you pay tens of thousands of dollars for a rare U.S. coin that isn’t truly exceptional in some way.  Rarity, by itself, isn’t a sufficiently compelling attribute to drive high numismatic investment returns.

Rare U.S. coins are really constrained by a concept known in finance as the law of large numbers.  It is relatively easy for something that costs $100 to appreciate rapidly – it might eventually become $1,000, which is expensive, but not ridiculously expensive.  But when something starts at $100,000 or $1,000,000, it has a much harder time compounding at a high rate because no one can afford the final price.

Now, I’m not saying that rare U.S. coins are universally bad investments or that you should buy common date coins because they are destined to “catch up” to scarcer coins in terms of value.  I’m simply stating that the excellent buying opportunities that prevailed in the 1950s for key date U.S. coins are over.  Instead we should look forward and ask ourselves “What $100, $200 or $300 coin today, will be worth $10,000 tomorrow?”

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