Rare Coins vs Bullion

Numismatic (or Rare) Coins vs. Bullion

Precious metals investors who make the decision to protect their hard-earned savings from inflation and financial turmoil are quickly confronted with the next choice – what form to buy. Independent Living Bullion representatives get lots of questions from customers bombarded by conflicting information on TV, the Internet, or elsewhere. Here is some guidance on the debate of rare coins vs. bullion and how to make the right decision.

Right up front, we want to remind customers that the most crucial decision is whether to buy bullion or numismatic (aka collectible or rare coin) products. If you are an investor, the answer is bullion; numismatics are for speculators and collectors, not serious investors. The Spring 2011 issue of Precious Metals Quarterly explained the many pitfalls of rare coins.

The most common numismatic coins peddled by controversial "boiler room" type sales operations include pre-1933 gold coins (such as Double Eagle coins and St. Gaudens gold coins), Morgan Silver dollars, and contemporary "proof coins" like super-marked-up American Eagle proof coins.

The pre-1933 Double Eagle gold coin and the others mentioned above are usually "slabbed coins" or "graded coins" which are stored in protective plastic cases to create the appearance of high collectible value justifying substantial mark-ups above their melt value. In many cases, these coins are not rare or valuable at all (other than the value of their actual gold or silver content).

Why You Should Avoid Numismatic Coins:


Each numismatic coin type, each year, and each
condition level has its own sub-market, making it
especially difficult for anyone but extremely serious
collectors to make knowledgeable decisions.
  1. The transaction costs and premiums for buying rare coins are dramatically higher than for bullion coins, bars, and rounds. Customers usually get screwed by the huge markups (and/or buy-back discounts) in the illiquid, specialized rare-coin market. That's why Independent Living Bullion has chosen to leave this field of play to other businesses.
  2. Numismatics are no safer from government confiscation than low-premium bullion alternatives.
  3. There are NO tax advantages to buying collectible coins. The IRS views all precious metals, including bullion, as "collectibles" for the purposes of calculating capital gains. Purchases and sales of bullion coins, bars, and rounds are not reported to the IRS except in the rarest of circumstances.
  4. Trying to get the best price per ounce when it is time to unload your collectible coins may entail a lengthy search for the buyer who is looking for just what you happen to have. If economic conditions get tougher, this buyer may be very difficult to find at all. Even as more and more people search for a reliable store of value in the form of gold and silver bullion, fewer may be in the market for items like rare coins that are priced higher than their intrinsic metal value.
Numismatic Coin Spreads Confiscate Wealth
1924 $20 St. Gaudens Gold Coin (0.9675 oz) MS-63
Buy Price Sell Price Spread %
$2,350.00 $1,800.00 $550.00 30.56%

The transaction costs for physical precious metals are revealed by the "bid/ask spread." This spread is the difference between the premium per coin or per ounce that a customer pays to buy compared to the premium (or discount) that a customer receives when selling. As with any investment, the lower the bid/ask spread, the better.

This is where bullion vs. rare coins really shines. Reputable dealers offer spreads on bullion coins, bars, and rounds in the range of 4% - 7%, depending on the particular product and the quantity desired. Numismatic coins generally have spreads of 30% - 40% and often higher! That means as soon as you buy a collectible coin you should expect it to be worth 30% - 40% less than you paid for it. No savvy investor wants to be that far upside down on day one! Independent Living Bullion representatives have taken many phone calls from customers suffering severe cases of "buyer's remorse" after sinking their savings into these illiquid rare-coin "investments."

To be sure, those so-called "rare coin" companies are making an absolute mint with their bait-and-switch tactics and their overpriced, illiquid numismatic coins. And their customers are given bad advice at best – or ripped off at worst. The worst part is these rip-offs enable high-pressure "collectible coin" outfits to fund a vast array of slick TV commercials, impressive celebrity endorsements, and other "big ticket" ways to get even more unsuspecting precious metals buyers to pay far higher than is wise or necessary.

Bullion Coins, Rounds, and Bars Are the Smart, Pure Play on Precious Metals

Buy/Sell Spread Based on
Silver Price per Ounce of $28.61
Pre-1965 Dimes/Quarters
Quantity Buy Premium Sell Discount Spread %
500 Ozs $2.30 $0.00 $2.30 8.0%
2,500 Ozs $0.00 $0.00 $0.00 0.0%
1 Oz Rounds
Quantity Buy Premium Sell Discount Spread %
500 Ozs $1.40 $0.00 $1.40 4.9%
2,500 Ozs $1.30 $0.00 $1.30 4.5%
American Eagles
Quantity Buy Premium Sell Discount Spread %
500 Ozs $2.95 $1.50 $1.45 5.1%
2,500 Ozs $2.85 $1.50 $1.35 4.7%
Buy/Sell Spread Based on
Gold Price per Ounce of $1,575.00
1 Oz Bars
Quantity Buy Premium Sell Discount Spread %
10 Ozs $46.00 $-8.00 $54.00 3.4%
Australian Kangaroos
Quantity Buy Premium Sell Discount Spread %
10 Ozs $57.00 $5.00 $52.00 3.3%
American Eagles
Quantity Buy Premium Sell Discount Spread %
10 Ozs $83.00 $25.00 $58.00 3.7%

As with metals prices,
spot prices and premiums are subject to change.

Now that we have established why it is so important to buy bullion vs. rare coins for investment, the next most important consideration is to stick with the most popular bullion forms. That is why Independent Living Bullionoffers the most widely traded and familiar gold and silver bullion products. Our coins, rounds, and bars are stamped with their weight and purity. They are produced by government mints or reputable manufacturers. This could be important when it is time to sell your metal back. Here's why:

  1. There is always a large and active market for these popular bullion forms. Virtually any dealer in the country (especially Independent Living Bullion!) will be happy to buy an American Gold Eagle from you and pay a fair price – on the spot and without question. Alternatively, if you have an offweight and unmarked bar, or something outsized such as a 1,000-ounce silver bar, you may have more trouble selling it as quickly and getting a fair price. Many dealers cannot easily re-sell that sort of item.
  2. It is easy to establish fair value. The most popular products trade near their "melt value" – the value of their metal content based on the current spot market price. There is no uncertainty. When it is time to sell your metal, you can quickly and easily determine whether or not a buyer's offer is fair.

The final consideration is how to choose exactly which round, bar, or bullion coin to buy. Please note that this consideration is far less crucial than those mentioned earlier. If you avoid paying way too much for dubious collectible coins and stick with popular bullion products, your investment will allow you to capture essentially all the gains that can be had in the gold and silver markets. That said, we believe you can best secure those gains by buying whatever option offers the lowest premium at the time of your purchase.

We expect the metal itself to produce outsized returns. So the name of the game is to acquire as many ounces as possible today and let those ounces go to work for you.

To illustrate, take a look below at this hypothetical scenario, based on Independent Living Bullion's sell pricing and buy-back pricing as of early November 2011.

Initial Investment of $100,000,
Silver Spot Market Price = $28.61/oz

(Total Buy Price Per Ounce = Silver Spot + Premium)

Ounces
Purchased
Pre-1965
Dimes/Quarters
1 Oz
Rounds
American
Eagles
3,495 3,343 3,179
$100,000 Investment Liquidation
Based on a Spot Market Price of $60.00/oz
Pre-1965
Dimes/Quarters
1 Oz
Rounds
American
Eagles
Holding in Ozs 3,495 3,343 3,179
Value $209,717 $200,602 $195,486
$ Gain $109,717 $100,602 $95,486
% Gain 109.7% 100.6% 95.5%

As this example demonstrates, even though an investor can expect Silver American Eagles to be worth $2.00-$3.00 more per ounce more than the pre-1965 90% silver coins when it is time to sell, he would enjoy higher gains if he bought the pre-1965 coins because he would acquire more silver ounces for his money. In an alternative scenario wherein the sell-back premiums on American Eagles rose by $2.00, enabling one to pocket nearly $64 per ounce (instead of just under $62/oz.), the investor would end up with $203,456 – surpassing the total return on junk silver. But sell-back premiums on pre-1965 "junk silver" could rise, too – markedly so if there is a run on the physical market.

To summarize, we think precious metals investors will do best by following these guidelines:

  1. Stick with bullion coins, bars, and rounds.
  2. Buy the popular bullion forms. Avoid un-marked, off-weight, or oversized bars and rounds.
  3. Buy whatever offers the lowest premium in order to accumulate as many ounces as possible.

Sincerely,
Stefan Gleason Signature
Stefan Gleason, President
Independent Living Bullion