Market Blog - Written by Doug Winter on Tuesday, March 1, 2011 15:38 - 10 Comments
The Great Coin Drought
There’s an ebb and flow to the coin market cycle. When it is in perfect, Zen-like harmony, the market works well. When it’s disrupted, the market sputters as is the case of what we are seeing in the beginning of 2011. I call it the Great Coin Drought and it’s been happening for at least two years; maybe more.
The coin market is based on a classic supply and demand relationship. When there is more demand than supply, prices rise. Simple, no? But what if there is strong demand but a backlog of supply due to reasons that aren’t that obvious?
(Before we get started, let me interject one quick point. There are zillions of coins for sale right now, ranging in value from a few dollars up to hundreds of thousands of dollars. If you aren’t selective, you can plow through a giant wad of cash in a matter of days. I’m referring to choice, rare and interesting coins; the sort that are reasonably hard to find in a “natural” market but which are incredibly challenging to locate in a constricted market like what we are seeing now.)
People sell coins for a number of reasons. A collector might sell a coin because he has found a better example of a specific date and doesn’t want to have cash tied up in a duplicate. An investor sells for different reasons. In a nutshell, if prices rise he sells.
Let’s take a look at some of the things that are disrupting the flow of rare coins right now and why this so-called Coin Drought exists.
1. There are still too many low end, crappy coins in both NGC and PCGS holders on the market. Let’s face it, it’s really easy to sell nice coins right now. If I have, say, a beautiful piece of Proof gold or a fresh, crusty Dahlonega half eagle I can list it on my website on Monday and by Tuesday its almost a certainty that it’ll be gone; assuming that it is priced fairly. But the bottom feeders who you could count on in the past to buy the overgraded, puttied piece of Proof gold or the bright, processed marginally AU Dahlonega half eagle in the AU58 holder are no longer active. What happens with these crappy coins is that they either get stuck in a dealer’s inventory where they jam up cashflow or they are placed in an auction where they invariably sell cheaply and hurt the market.
In the rare date gold market, until more of this “swill” disappears from the market, the supply and demand ratio will remain broken.
2. As I have said a number of times before, the price reporting mechanism in the rare coin market is broken and needs to be fixed. How many times have you seen the Greysheet or Trends whack prices for a rare date or entire type because of one sale? Let me give you an example. Let’s say that a certain rare date San Francisco Liberty Head eagle has a Trends value of $6,000. Over the course of two years, three appear for sale and all bring in the range of $5,000-5,500. But then a real pig-in-a-holder appears at auction and it brings $3,500. Instead of looking at this coin on a case-by-case basis and interpreting the data, what tends to happen is that the price for this date gets chopped down to $4,000 to reflect this one trade. Suddenly the three people who purchased the nice AU’s of this date at auction are upside down and have no motivation to sell their coins.
If price reporting could become more accurate and reliable (and I realize that this is a monumental project) then the Coin Drought wouldn’t be as much of a problem as it currently is.
3. The economy is still shaky (although it is clearly better now than it was two years ago) and many collectors would just as soon own some nice quality extra coins than they would sell them. I often have this conversation with collectors:
Me: Would you be interested in selling that nice Carson City eagle that you bought from me in 2008?
Collector: Well, I don’t really need the money, there’s no coins around right now that interest me and I can’t make anything if I sell it. Remind me again what my motivation is?
When collectors just don’t want to sell coins, this leads to a further drought. And can you blame them? Smart collectors are aware of the fact that nice coins are very hard to find and that by selling them, they may find themselves in the position of not being able to replace them. Couple this with the taxes they have to pay on profits and you can see why so many high end, neat coins are staying put.
4. Many dealers who were previously major players in the rare coin market are preoccupied with moderns and/or bullion. I can think of a number of dealers who are doing so well with moderns and generics that they are not participating in the rare coin market. This, too, interrupts the flow of coins.
5. Another point that I’ve made in the past bears repeating. The number of nice coins in any given 19th century series is fewer than most people realize due to rampant coin doctoring over the past few decades. There are a number of major submitters to PCGS and NGC who doctor virtually every coin that they own (be it a light dip, a small pinch of nose grease or a major “rebuild” with putty). For certain series, like C+D mint gold, I’m guessing that the percentage of original coins is now well less than 5-10% of the surviving population. This means that while there might be, say, three 1838-C quarter eagles on the market in AU50, none of these is choice or original and it is likely that they will choke the coin flow due to the difficulty in selling them.
It will be interesting to see how long the Coin Drought lasts. I’m thinking it will be for quite a while and may even become a semi-permanent condition. As I stated above, there aren’t that many nice coins around to begin with and as long as the demand stays constant or increases, collectors who are fussy and sophisticated will have their work cut out for them.
10 Comments
“pig-in-a-holder” That phrase just made my day.
This blog could have been called “Tough Love for Emerging Collectors”. It was a bit depressing to read but I very much appreciate your honest view of the market. The depressing part is that so many coins have been tampered with. I want to acquire cool, rare, unmessed coins and there haven’t been many coming to market and when they do, the battle to buy is tough. I hope to experience the functional market you describe but it doesn’t feel like it will happen anytime soon. In the meantime, I will look to be patient and try to be aggressive when the “right coins” come. Great read. TL
I am also pessimistic regarding a return to a ‘functional market.’ The recession brought out so-so coins, modern mint products, old jewelry, etc., but not much as far as neat coins are concerned—these remain in strong hands. Low-end coins are everywhere. Only a small percentage of coin collectors takes the time needed to learn what is nice for a grade and what the market values for nice coins really are. As you indicate, price guides are biased by low-end coin values. But…when less studious collectors look at Greysheet and see that a dealer insists on a much higher price for a given coin, what does the collector do? Walk away. I’m not sure that there is a solution to this problem, because the ‘swill’ will always be with us. Serious coin collectors need to be exceedingly patient in times like this, and not give in to the urge to buy any old coin that happens along–make each purchase count.
I’ve long wondered what the mechanism is for flushing low-end dreck from the market. Take the processed AU Dahlonega half eagle you mention- how would such a coin “disappear”?
When the right nice, crusty coin comes up for sale, I have to make a choice: balk at the price or go ahead and overpay. But what is “overpay”? really?. At the end of the day, its all about getting the right coin. If it is the best available, you gotta throw out the $$$ signs – life is short. If you are a true long-time holder/collector, more often than not, you will make your $$$ back and more. It was like a ’39-D half eagle, VF-35 I bought back in ’93 for close to $1800 or $1900. Nice, crusty… I thought that was a tough price at that time. It about doubled when I sold it in the mid-2000′s Heritage Chicago auction… more than I expected. Now I wish I could buy it back – I can’t find its equal for the grade – the quality is not out there anymore.
great post. i am like other collectors as well who don’t sell the coins unless i find a better replacement.
Mark - Mar 1, 2011 06:46 pm