Rare coins, as opposed to gold bullion coins, aren’t ever reminted, which means that this exclusive market revolves entirely around the availability, liquidity, supply and demand of coins that have already been produced. In this post we’re going to look at how these factors affect and determine the value of a rare coin as well as its official grading. Rare coins have developed an international reputation for being one of the most liquid assets of all collectable markets and historically deliver a high ROI, which is why it’s important that you understand these evaluation aspects before you start investing in what is generally considered a lucrative market.
The Coin Liquidity Factor
The liquidity factor of a coin basically comes down to how quickly a coin should or would sell under normal market conditions at an auction, through a private seller or through a dealer. The liquidity factor was first developed by JT Stanton (President of PCI Grading Company) and is based on a scale of 1-5. A liquidity factor of ‘1’ indicates that a coin would be difficult to sell (on the market for an extended period of time) or would sell for less than its recommended value. A liquidity factor of ‘5’ indicates that that a coin would sell quickly for the recommended value, or even inflated value in some cases. Bear in mind that highly active market conditions also help inflate the liquidity of any coin. Added to this, liquidity is aided along by a 24-hour online world audience. At any given time, anywhere in the world, there are coin dealers, investors, collectors and hobbyists online, ready to buy and sell. One thing you need to give serious consideration to before you purchase a rare coin is its long term realization. You need to be sure that the coin(s) you invest in are going to give you the best ROI possible, so find out as much as you can about them before making any decisions. For example, what have they previously been bought and sold for, how long do they generally stay on the market for before selling and what is its general annual ROI?
The Coin Supply Factor
As we mentioned before, rare coins are no longer minted, so their supply is based purely on what has already been manufactured and what is available. The supply of rare coins, as well as any reduction in market availability, is affected by a number of factors: either the coins are put into circulation; they are melted down to extract the original metal content; they are lost or irreparably damaged through careless storage or handling; they are donated to museums or they are held permanently in private collections. Once all these factors are taken into consideration, it becomes clear why particularly valuable rare coins are so hard to source and why, if a collector does have one, they are rarely put on the market.
The Coin Demand Factor
Put simply, the higher the quality, condition and rarity of a coin, the more valuable it becomes and therefore the more in demand it becomes. The general consensus is that the rare coin market has four levels of demand. The first level considers the ‘face value’ of a coin. For example, a silver dollar minted a century ago could still be used today to pay for something that costs a dollar. The second level considers the price of the metal that a coin is manufactured from, although with rare gold coins this is only one factor in the valuation of a coin (alongside rarity, preservation and age.) In contrast, the value of a Krugerrand lies purely in the intrinsic value of the metal it’s manufactured from, if the price of gold goes up or down, so does the value of the coin. The third level considers how much a collector is willing to pay over the intrinsic value of the metal of a coin. If the coin is a particularly good specimen, rare and highly sought after, its overall value is going to be considerably high. The fourth and final level considers the future realization of the coin and for the more serious collectors and investors is possibly the most important level of demand. What has the coin previously fetched in auctions and what is the average annual ROI you can expect to receive from it?
Once you’ve had the opportunity to assess the liquidity, supply and demand of the coins you are interested in, you can decide whether it will be an appropriate investment for your portfolio or collection. It’s important to remember though that with rare gold coins their value only ever appreciates over time.
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