Gold has begun to glitter again, and gold bugs are exhorting us to climb aboard and strap ourselves in for a rocket ride to the Moon.

There’s no way of knowing how high this hopeful boomlet will carry the yellow metal. Before we get too comfortable on the launching pad, however, we ought to reexamine the events of recent years, especially in the market for generic gold coins.

It will soon become apparent that far from embarking on a rocket trip, those who buy gold coins today could actually be in for a roller-coaster ride.

The fact of the matter is that over the last half- decade, gold coins have risen in value dramatically in many cases, only to lose that added value in a relatively short period of time.1990 W Gold $50 American Eagle NGC PF 70 Ultra Cameo

The gold coin marketplace has been shattered by volatility and by sharp ups and downs that often have little or no correlation to the current price performance of the yellow metal itself. This has served to magnify the risks for those who venture into this market. But at the same time, it also has created opportunities for those with the savvy and wherewithal to use the peaks and valleys to their advantage. At the very outset, it’s crucial to understand the difference between “generic” gold coins and those that are genuinely rare.

Generic coins are those which exist in sufficient quantities to be traded as like-kind units–very much like commodities.

These coins may be in high levels of preservation; more often than not, in fact, those traded frequently in the current marketplace are in mint-state condition. But they’re readily available in those grades, so buyers and sellers have quick access to sources of supply. And one is treated much like any other, so that these coins are interchangeable. Common-date Saint-Gaudens double eagles ($20 gold pieces) are viewed, for example, as generic coins.

By contrast, truly rare coins are one-of-a-kind pieces, and each has its own personality. Low mintage, not high quality, is the key determining factor in their value. Some, of course, possess not only rarity but also exceptional quality–and that combination greatly enhances their value. But unlike generic coins, truly rare coins are treated first and foremost as collectibles, not commodities; they’re regarded as distinctive, rather than interchangeable.

No-motto Liberty Head half eagles ($5 gold pieces)– those minted between 1839 and 1866 without the motto IN GOD WE TRUST on the reverse–fall within this category. They’re very scarce as a group, with mintages generally well under 100,000, and flat-out rare in a number of individual instances.

Precious-metal content forms an important part of generic gold coins’ value–much more so than it does in the case of rare gold coins. This is particularly true for coins in high circulated grades such as About Uncirculated-55 or 58, and in low-end uncirculated grades such as Mint State-60 through 62. In these levels of preservation, generic gold coins are virtually “bullion” coins: They command just a modest premium over the market value of the metal they contain, and they rise and fall in value as the precious metal itself goes up or down in price.

The price differential widens considerably as the grade level moves up to Mint State-63 and above. And at times when the market is bullish, the differential balloons even more. Conversely, when conditions are adverse, the differential contracts.

Since May of 1989, when the coin market scaled its last major peak, high-grade generic gold coins have fallen in value sharply–even though gold itself actually went up in value slightly during that time: The average price of gold was $372 an ounce during May of 1989, and this July it averaged just under $400. But during that span of more than four years, there have been a number of well-defined points when these coins rallied. And those who were shrewd and/or fortunate enough to ride the up-and-down waves in the marketplace, buying at low ebb and selling at high tide, could have made–and, in some instances, did make–very substantial profits.

Let’s look at a few examples:

  • The Certified Coin Dealer Newsletter (or Bluesheet) of May 26, 1989, assigned a value of $3,950 to common-date Saint-Gaudens double eagles graded Mint State-65 by the Professional Coin Grading Service (PCGS). In early June 1993, those same coins were valued at $1,440, meaning they were worth only about 36.5 percent of their 1989 peak value. But they didn’t fall to that point in a straight line. On July 3, 1992, for example, the Bluesheet listed them at just $1,010, only about 25 percent of their May ’89 peak–so between then and June of this year, they actually rose in value nearly 50 percent. And similar swings, quite dramatic percentage-wise, have occurred throughout the four-year period.
  • On May 26, 1989, the Bluesheet set the market price at $2,400 for Indian Head eagles ($10 gold pieces) graded MS-63 by PCGS. In June 1993, those coins were worth $1,400, or 58 percent of the peak. But in July 1992, they had been worth only $790, or less than one-third of the peak. Thus, between then and June of this year, they rose in value nearly 80 percent
  • On May 26, 1989, the Bluesheet valuation was $3,050 for Liberty eagles with IN GOD WE TRUST graded MS-63 by PCGS. In June 1993, those coins had a market value of $1,240, or roughly 40 percent of the peak. But that was still more than 40 percent higher than their value in July 1992, when the Bluesheet listed them at only $875.

Not all generic gold coins fell as far as these, or have fluctuated as greatly during the last four-plus years. But many have experienced significant swings in value, creating opportunities to buy and sell advantageously–even though the coin market has remained depressed throughout this period, relative to its status in May 1989.1922 Saint-Gaudens double eagle graded PCGS/CAC MS64

Rare gold coins, by contrast, have had no similar intermediate ups and downs; rather, they have remained unremittingly depressed. The reason for this is simple: Being unavailable in quantity, rare coins cannot be promoted profitably–manipulated, if you will–by numismatic entrepreneurs, the way their generic cousins can be. Thus, they don’t enjoy the temporary boosts in value generated by what might be called artificial market stimulation. Instead, they lie dormant until the market regains more permanent underlying strength.

Truly rare coins benefit more dramatically than generic ones when market conditions are bullish–and I consider them much better buys from the standpoint of long-term investment. Just as their malaise is more persistent and pronounced during market slumps, their performance is also more spectacular and sustained when the good times roll. They have the potential to soar in value far faster and higher when the inevitable turnaround occurs–and justifiably so, since they are more elusive and desirable.

But, as we have seen since 1989, the coin market–like any other segment of the economy–is subject to its share of slumps, and these can be protracted. And during such periods, it’s comforting and challenging for action-oriented “players” to know that there is still some ferment in the marketplace and they still have a chance to realize meaningful profits on a short-term basis without having to wait for the possibly distant light at the end of the long-range tunnel.

Anyone who purchased rare gold coins during the last four years has probably incurred paper losses; those coins are very likely worth less today–perhaps a great deal less– than when they were acquired. And their prices have trended consistently downward, furnishing little or no window of opportunity for selling them at a profit along the way. With generic gold coins, on the other hand, handsome profits could have been made through judicious buying and selling.

Many generic coins lost 50 percent of their value between May 1989 and May 1990, then regained roughly half the lost value before sinking lower again. This ebb-and-flow pattern was subsequently repeated twice more. Let’s say a certain coin was worth $10,000 in May 1989 and you bought it a year later for $5,000. You could have sold this coin for $7,500 when the market rebounded temporarily, then bought it back for $5,000–or even less–at the next bottom and sold it again at a profit when it went up. By doing this several times, you could have doubled or tripled your money during the four-year period–in the very teeth of a raging bear market.

A word of caution: This is a gambler’s game–one that can be extremely risky. In a sense, it’s like playing musical chairs with your money, and it’s not something an ordinary consumer can be expected to do. In fact, even expert dealers have trouble doing it successfully.

Having said this, the fact remains that most of the profit-making opportunities in the coin market during the last four years–short of waiting years for the market as a whole to turn around–have existed in the area of generics. While other coins were dropping in price like rocks and then simply staying low and flat, generics were behaving more like bungee-jumpers–bouncing up after each plunge and giving people a chance to cash in their chips.

In this sense, volatility can be–and has been–the investor’s best friend in time of need. And if ever coin investors needed a friend, the last four years have been the time.

If you decide to try your luck and gamble on generic gold coins, I urge you to limit your investment to totally discretionary funds–money that isn’t essential to your economic well-being.

To play this market properly, you should buy at times when both gold itself and generic gold coins are relatively low-priced, compared to near-past levels, and sell at times when prices are trending upward without economic justification.

Let’s say a certain generic gold coin has increased from $200 to $500–and we’ve seen this happen with a number of gold coins in the last couple of years–and the coin is a relatively common one of which thousands of examples are available in a comparable level of preservation. If the only apparent reason for the price increase is the fact that a certain company is promoting this coin, then you should sell it and take your profit (assuming that you purchased it while the price was lower). Then, when the price comes down again after the promotion, as it almost certainly will, you can buy the coin again and wait for another chance to repeat the sell-buy cycle.

If you believe the price increase resulted not from promotion but rather from genuine economic justification, and you believe the justification will last, then you should consider turning your attention to coins with greater long- term potential–rare gold coins, for example. Those should do far better in the long run.

Factors that would constitute true economic justification include inflation, an expanded money supply and increased federal spending. Generic gold coins WILL go up in value in times of high inflation, just as gold itself will go up. But truly rare coins will go up even more, so that’s where you should turn your attention at such times. Gold may not be heading to the Moon anytime soon, so it’s probably premature to make a reservation on the gold bugs’ rocket ride.

But roller-coaster rides can be exciting, too–and possibly even rewarding. So while reconstruction continues on the coin market’s launch pad to outer space, why not enjoy one of the most stimulating rides now being offered here on Earth:

Go for the generic gold!



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