Photo Credit: PCGS
In today's age of serial asset bubbles, it is easy to believe that financial history began in the late 1990s. But this is not the case. Few investors know this, but the U.S. rare coin market experienced a truly gargantuan certified coin bubble in the late 1980s.
I had my own, personal experience with this certified coin bubble. In the late 1980s, I was subscribed to COINage magazine, a nationally distributed industry periodical. Among its pages I found an advertisement for a coin I desperately wanted - an 1872 U.S. three-cent nickel that was certified MS-62 by PCGS. This eccentric coin was available for the princely sum of $795, an amount that a 13 year old boy in 1989 could never hope to afford. In the end, that was probably for the best.
The U.S. mint struck the three-cent nickel from 1865 to 1889. This small, odd-denomination coin was a reaction to a shortage of small change that arose during the U.S. Civil War. During the war, the U.S. government issued "shinplasters" - cheaply-made, legal tender fractional notes meant to temporarily satisfy demand for low denomination cash. Once the war ended, the U.S. mint flooded the economy with small-denomination coins to replace the hated shinplasters. The three-cent nickel was one of these new, post-Civil War denominations.
The three-cent nickel that I badly coveted wasn't in a particularly high condition. MS-62, otherwise known as Mint State-62, is much closer to the lowest mint-state grade of MS-60 than the perfection of MS-70. An MS-64 or MS-65 example really would have been much better (and more expensive). But a mitigating factor was that 1872 was a somewhat less common date for the three-cent nickel series. The mintage was only 862,000 versus 11 million plus for the most common date in the series.
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That scarcity didn't stop the coin from plummeting in value when the certified coin bubble burst. Even today, nearly 30 years later, you can still buy a slabbed MS-62 three-cent nickel for only $200. That is a stunningly high cumulative loss of nearly 75%. If you measure the decline in inflation-adjusted terms, the situation is even worse, with a loss of over 88%!
There were several root causes of the massive certified coin bubble of the late 1980s. First, memories of the 1970s and its dreaded inflation still lingered in the minds of many investors. In early 1987 the price of silver spiked to more than $10 a troy ounce, almost double its normal price at the time. Many people thought inflation might be making a comeback and rare coins seemed to be the perfect way to hedge this risk.
Another contributing factor to the late 1980s certified coin bubble was the 1987 stock market crash, widely known as Black Monday. On October 19th 1987, the Dow Jones Industrial Average collapsed by 22.61%. It was the largest one day percentage loss in the index's history. Even though the resulting bear market in stocks was over within a few months, many disillusioned equity investors looked for alternative investments. Numismatically valuable U.S. coins seemed to offer a good substitute to the treacherous stock market.
But the most important factor in the certified coin bubble was undoubtedly the development of slabbing itself. Third-party certification was an attempt to impose grading standards on an industry that was famous for its inconsistency. In 1985, PCGS became the first third-party coin grading company. PCGS found immediate success in the numismatic industry and soon spawned a close competitor, NGC, in 1987.
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The advent of independent, third-party certification had a seismic impact on the rare coin industry. Before slabbing, numismatics was overrun with fly-by-night companies and boiler-room operations that sold severely over-priced, grade-inflated coins as investments to unsuspecting consumers. The arrival of PCGS and NGC changed the industry nearly overnight. Now dealers, collectors and investors could buy or sell slabbed coins "sight unseen" because they all trusted the grades given by the major grading services.
This situation is typical of all great bubbles. A legitimate innovation or discovery takes place that promises the future creation of tremendous wealth. In this case, the certified coin bubble was driven by the almost religious belief that slabbing would transform the numismatic market. It was widely thought that certified coins would enjoy greatly improved liquidity generated via massive institutional demand from financial firms. Proponents at the time felt these factors justified perpetually rising rare coin prices.
As the late 1980s unfolded, the enthusiasm for slabbed coins reached a fevered pitch. As with so many other bubbles, it didn't take long for Wall Street to join the certified coin bubble. In February 1989 the respected financial firm of Kidder, Peabody & Co. started a limited partnership, the American Rare Coin Fund. A year later Merrill Lynch launched a similar fund called the NFA World Coin Fund Limited Partnership. UBS, another Wall Street firm, created an internal rare coin division dedicated to advising its high net worth clients on numismatics. The potential for certified coins seemed almost limitless at the time.
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And then it all came crashing down. The U.S. certified coin bubble peaked sometime in mid 1989 and slowly - almost imperceptibly at first - began to weaken. By late 1989 some categories of high-grade, common date coins, like Morgan silver dollars, were clearly in decline. But the real, gut-wrenching carnage didn't hit numismatic dealers and coin shows until the 1990 - 1991 timeframe.
The PCGS3000 Index, a key indicator of the rare U.S. coin market, peaked at $181,088 in May 1989. The index bottomed out in December 1994 at $46,819 - a vicious 74% loss. Even now in January 2018, the PCGS3000 index rests at $57,076 - a loss of more than 68% since the 1989 peak.
I think it is important to learn the right lessons from the late 1980s certified coin bubble. It isn't that tangibles are bad investments - far from it, in fact. I think that tangible assets are, generally speaking, great buys at the moment. After all, some high-grade, certified U.S. coins are available today for the exact same prices they sold for in the mid 1980s!
Instead, you should be wary of any asset class that is over-hyped by the financial media and Wall Street. Avoid investing in that hot stock or index fund that all your friends, co-workers or relatives can't stop talking about. Right now these dangerously overvalued assets include high-flying tech stocks, like Netflix, Amazon and Tesla, along with virtual crypto-currencies like Bitcoin. Ironically, some certified U.S. rare coins are a great investment at today's prices; it just took nearly 30 years to get there.
Read more thought-provoking Antique Sage coin articles here.
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Japan's Finance Minister during the early 1930s, Korekiyo Takahashi, is talked about by modern-day economists in hushed, reverent tones. His economic policies are widely credited with having saved Japan from the worst effects of the Great Depression. In fact, Korekiyo Takahashi is sometimes called the Japanese Keynes, after John Maynard Keynes, the British economist whose radical theories gained widespread credibility in the wake of the Great Depression.
Before we continue, let's review some historical background. In the late 1920s most nations were on the gold standard. The gold standard allowed citizens to exchange their national currency for a predetermined amount of gold on demand, usually in the form of gold coins. It was very effective at controlling inflation and imposed significant fiscal discipline on both governments and the banking industry. It also established de facto fixed exchange rates between all nations that followed the gold standard. This allowed entrepreneurs and businesses to more accurately project the long-term viability of international commercial ventures.
However, the Great Depression shattered the prevailing economic and monetary assumptions of the era. Although it started with Wall Street's infamous October 1929 crash, the Great Depression did not stay isolated in the U.S. financial sector for long. After steadily increasing in severity for many months, the Great Depression entered its most virulent phase with the collapse of the venerable Austrian bank Credit-Anstalt in May 1931.
After this coup de grâce, the pre-existing global economic order rapidly disintegrated. Between 1929 and 1932 the value of global trade fell by a stunning 50% or more. Unemployment also rose to dizzying heights, reaching 25% in the U.S. in early 1933. Foreign nations experienced similar, although generally not quite as severe, spikes in unemployment.
This was the dreadful scenario in which Japan's finance minister, Korekiyo Takahashi, found himself. He reacted to the crisis both decisively and in a way that would forever endear him to modern economists. First he abruptly took Japan off the gold standard in December 1931, causing the yen to depreciate by 60% against the U.S. dollar and 44% against the British pound. The resulting weaker yen stimulated Japanese exports.
Next, Korekiyo Takahashi slashed interest rates several times in the 1932-33 period. The Bank of Japan's discount rate fell from more than 6% in early 1932 to well under 4% by mid 1933. This helped ease the economic pressure on Japanese companies and financial institutions.
Finally, the Bank of Japan also engaged in large-scale, direct monetization of government debt. In effect, Korekiyo Takahashi, in his capacity as the Japanese Minister of Finance, encouraged the national government to run extremely large budget deficits. This was done with the explicit understanding that the Japanese central bank would buy all government bonds issued to finance this deficit spending, thus resulting in no impact on interest rates. In other words, the Japanese central bank, at the behest of Korekiyo Takahashi, printed oodles of money and gave it to the government to spend.
These radical new economic policies appeared to be entirely successful. After experiencing double-digit deflation in both 1930 and 1931, Japan's wholesale price index went positive for the rest of the 1930s, only briefly flat-lining in 1934. Industrial production followed a very similar, upward path to wholesale prices. Although the Great Depression tore into the Japanese economy in the very early 1930s, Korekiyo Takahashi's quick action seemed to save the day.
Modern economists, at least, fully embrace this orthodox view of history. They both admire and celebrate Korekiyo Takahashi's economic achievements, while seeking to emulate many of his policies. Unsurprisingly, many modern central bank policies are incredibly similar to Japan's 1930s economic experiment. That isn't an accident, either. Korekiyo Takahashi effectively engaged in Keynesian economic policies before Keynes even fully developed his theories in the mid 1930s!
In fact, Japan's current economic policies are specifically modeled after the policies Korekiyo Takahashi pioneered during the Great Depression. Referred to as Abenomics after their chief advocate, Japanese Prime Minister Shinzo Abe, these economic policies are intended to extricate Japan from its 25 year long (and counting), soft depression. Abenomics relies on monetary easing, fiscal stimulus and economic reforms to jump start the Japanese economy, a combination that intentionally echoes Japanese economic policies of the 1930s.
What they don't tell you in the history books, though, is that the aggressive monetary policies pursued by Korekiyo Takahashi were actually inflationism. And while they appeared to be an unmitigated success in the case of Japan's Great Depression, looks can be deceiving.
For example, the primary mechanism by which the weaker yen contributed to Japanese economic recovery was via stimulating exports. But this was a zero sum game. Japan's benefit only came at the expense of trade partners who refused to devalue their currency as quickly or as steeply as the yen. This had serious political side effects later on, as it made the European colonial powers in the region less willing to negotiate with a Japanese nation that had exported its way to prosperity on their backs.
Inflationism also creates special interest groups who benefit disproportionately from loose monetary policies. Whichever group is closest to the central bank money spigot quickly becomes unimaginably wealthy. These special interest groups are usually dominated by large corporations and politically-connected individuals. They are able to mobilize significant resources with their newfound wealth in order to influence local or national policy. They can hire more lawyers, employees and lobbyists than the other groups in society who aren't direct beneficiaries of central bank largess.
One of the first things these inflation-driven special interest groups attempt to do is ensure that loose central bank monetary policies continue without interruption. Unfortunately for Korekiyo Takahashi and the Japanese people, one of the special interest groups who benefited most from his money-printing spree was Japan's military establishment. Much of the deficit spending that the Bank of Japan monetized in the 1930s went directly into the national military budget. In fact, Japanese defense spending nearly doubled between 1931 and 1935, rising from ¥563 million to ¥1,134 million.
Takahashi later attempted to "do the right thing" by reducing Japanese military expenditures once it became apparent his policies had succeeded in jump-starting the economy. But the Japanese military, especially its ultra-nationalist hardliners, were in no mood to see their budgets cut. On February 26, 1936 a group of ultra-nationalist army officers, along with approximately 1500 troops under their command, staged a coup in Tokyo in the hopes of wresting the government from civilian control.
As part of this plot, they assassinated Korekiyo Takahashi as he slept at home in his bed. Although the ultra-nationalist coup was ultimately put down by the military, the damage done to the civilian government was fatal. Korekiyo Takahashi had been an influential voice of moderation in a period of rising Japanese nationalism. Despite the coup failing, his death effectively ushered in military domination over the civilian Japanese government. Once this happened, a war in the Pacific against Anglo-American power was inevitable.
Yes, it is possible that the Japanese military would have seized control of the civilian government anyway, but the Bank of Japan's loose monetary policies made this outcome inescapable. In effect, Korekiyo Takahashi was indirectly responsible for World War II in the Pacific by enabling the rapid expansion of Japan's military machine via freshly printed money. His policies may have shortened Japan's Great Depression, but only at the expense of the nation's near total destruction a mere 10 years later. Only modern-day central bankers could be foolhardy enough to think that recreating Korekiyo Takahashi's failed policies are a good idea!
Of course, these revelations have major parallels to our own time. Central banks around the world have been pursing bubble-centric economic policies for a decade at this point. This has given inflationism, and its associated special interest groups, ample time to entrench themselves in national economies around the world.
The United States is a prime example of this trend, with monopolistic technology companies, merciless healthcare conglomerates and manipulative financial corporations the primary beneficiaries. I believe that 1930s Japan is a cautionary tale for today's central banks. They would do well to keep in mind that sometimes even seemingly perfect policies can have unintended consequences.
Out of all the precious metals, none have been as exalted in the modern age as platinum. For more than a century this most desirable of precious metals has been coveted by people as diverse as Hollywood movie starlets and titans of industry. Incredibly rare, this dense, chemically-stable, gray-white metal has an occurrence of only 0.003 parts per million in the earth's crust. Platinum is so rare, in fact, that its annual mine production is less than 1/15th that of gold.
Platinum has been used in fine jewelry, luxury watches and high-end objects d'art for well over a century. And yet, shockingly, platinum used to be considered a junk metal. This, along with many other interesting tidbits, is reflected in the historical record of the platinum gold ratio. The platinum gold ratio expresses the value of a single troy ounce of platinum in terms of gold and is often used by precious metal investors to gauge relative value between the precious metals. A high ratio means that platinum is expensive compared to gold, while a low ratio means that platinum is cheap in relation to gold.
The chart above shows the platinum gold ratio from 1880 through 2016. By closely examining the graph, there are a few important observations we can make. For example, the platinum gold ratio has been extremely volatile. Over the past 135 years it has been as low as 0.05 in 1885 and as high as 6.63 in 1968. However, within the last 40 years, the ratio has traded in a far more constrained range, generally hovering between 0.8 and 2.0.
Although it may seem odd to us today, the platinum gold ratio was extremely low in the late 19th century. This was because the relationship between platinum and gold was fundamentally different before the 20th century. Before 1900, platinum was something of a scientific oddity while gold was universally considered money.
In pre-modern times, platinum had been used by various pre-Columbian South American civilizations. Later, Spanish explorers panning for gold in South American alluvial deposits were perplexed by the strange white metal and, believing it to be immature gold, often threw it back into the streambeds so that it could "ripen". Although platinum was first officially noted by the Italian scholar Julius Caesar Scaliger in 1557, it languished unappreciated for centuries due to its extremely high melting point (1,768.3° C or 3,214.9° F) which made it very difficult to fabricate.
But people did try to find uses for the enigmatic metal. Foremost among these was employing platinum to counterfeit gold coins! Because many nations were on the gold standard in the 19th century, gold coins circulated freely. At this time platinum traded for just a fraction of the value of gold, as evidenced by the extremely low 19th century platinum gold ratio. However, platinum (21.45 gm/cm3) happens to possess a similar density to gold (19.3 gm/cm3). This made platinum the perfect metal to counterfeit gold coins during the 19th century. Today, these contemporary platinum counterfeits are quite rare, and usually command higher prices than genuine gold coins of the time!
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The 19th century Russian Czars took this trend one step further and actually introduced platinum coinage for general circulation. In the early to mid 1800s, large quantities of platinum-alloy nuggets were recovered from alluvial deposits in the Ural Mountains. The Russian Czars hoped to take advantage of this by turning the unusual metal into coins.
Between 1828 and 1845, Russia struck a series of circulating platinum-alloy coins in 3, 6 and 12 ruble denominations. Unfortunately, the Russian people, having no familiarity with platinum, rejected the unusual platinum coins wholesale. Relatively few coins were struck and specimens command exorbitantly high prices today when they come up for sale.
It was only around 1900 that the technology to easily work platinum was first developed. It arrived in the form of the super-hot, oxy-hydrogen melting torch. Only an oxygen-enriched hydrogen stream burned at a hot enough temperature to melt the recalcitrant metal. This invention finally democratized platinum, allowing the gray-white precious metal to be worked by jewelers and other craftsmen.
As a direct consequence of this development, demand for platinum in high end jewelry skyrocketed. Platinum was perfect for the application. The metal was chemically inert; it neither tarnished nor corroded. In addition, platinum is harder than gold, giving it better wear characteristics.
The gray-white precious metal is also extremely strong, which was a boon to early 20th century Edwardian and Art Deco jewelry designers. Jewelers used platinum to create fabulously complex pieces using platinum wire, sheet and gauze that would have been impossible with traditional gold or silver-topped gold alloys. The fashion for "white look" jewelry reached its apogee during the Art Deco period of the 1920s, when platinum was de rigueur.
At the same time that jewelry demand for platinum was taking off, the industrial applications of the metal were becoming apparent as well. Platinum is an excellent chemical catalyst and was instrumental in the growth of the fledgling oil and chemical industries. The scientific community also adopted platinum for crucibles, electrodes and thermocouples due to its durability, resistance to corrosion and high melting point.
These fresh sources of demand drove the platinum gold ratio to elevated levels above 2.0 from the 1910s through the 1920s. However, with the advent of the Great Depression both industrial and jewelry demand for platinum collapsed. As a result, the platinum gold ratio declined until it hovered close to parity from the 1930s until the end of World War II.
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In the aftermath of World War II, global economic growth accelerated again, underpinning demand for platinum. During this time it was also discovered that platinum could be used in catalytic converters to reduce pollution from automobile exhaust. Robust demand for the unique industrial metal sustained the platinum gold ratio between 2.0 and 3.0 from the late 1940s until the early 1970s.
The highest annual value recorded for the platinum gold ratio was a spike to 6.63 in 1968. This was undoubtedly the result of attempts by the U.S. and Western European central banks to suppress the gold price in the 1960s via the London Gold Pool, while the platinum price was free to rise in the highly inflationary environment of the time.
The platinum gold ratio then flat-lined around parity from the mid 1970s until the late 1990s, as both precious metals endured brutal bear markets after 1980. Starting in 2000, rising industrial demand for platinum, coupled with stagnate gold demand, combined to elevate the platinum gold ratio until the Great Recession hit the global economy in 2008.
Since that time the platinum gold ratio has collapsed below 1.0, reflecting sluggish demand for the industrially-oriented white metal. In contrast, gold has enjoyed a safe haven bid as a monetary metal in recent years, propelling it to a higher value than platinum for the first time on a sustained basis since the mid 1980s.
Today, during the fall of 2017, the platinum gold ratio is lingering around 0.72. This is an exceptionally low value, historically speaking. In fact, ratios this persistently low were last seen in the late 19th century, before platinum's unique usefulness was fully realized! Although no one can predict the future, I suspect that platinum bullion is a better long-term buy right now than gold bullion, where you have to mind the stairs.
The last time before the present that coin collecting was popular in the U.S. was in the mid to late 1960s. This mid-century renaissance in numismatics was primarily driven by the impending abandonment of silver in circulating coinage. For over 125 years, the U.S. mint had used a traditional alloy of 90% silver and 10% copper for nearly all of America's circulating silver coinage.
However, due to the Kennedy administration's involvement in the Vietnam conflict and the subsequent inflationary "guns and butter" policy of president Linden B. Johnson, the government began over-issuing currency. This inflation naturally led the price of silver to rise in the global market. By the mid 1960s, it had become apparent that the U.S. government would need to replace the silver used in circulating coins before the intrinsic (bullion) value of the pieces exceeded their face value.
This development in U.S. coinage policy cultivated intense interest among the public. One side effect was the increased popularity of coin collecting, particularly among younger people. Although it was the twilight of circulating silver coinage in the U.S., it was a golden age for casual coin collectors.
During this period it was still possible to find desirable and rare coins in pocket change. In addition, iconic older coin designs such as Mercury dimes, Standing Liberty quarters and Walking Liberty half dollars still circulated side by side with more contemporary Roosevelt dimes, Washington quarters and Franklin/Kennedy half dollars. Children and adolescents everywhere happily sifted through rolls of coins, looking for better date examples to save.
Gresham's Law states that "bad money drives out good money". Consistent with this ironclad economic rule, valuable silver coinage began to be pulled from circulation and hoarded by the mid 1960s. Coin collectors were blamed as the scapegoat for the resulting shortage of circulating coins, even though it was the government's short-sighted inflationary policies that had driven up the price of silver in the first place.
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Finally, in 1964, Montana senator Lee Metcalf sponsored legislation that temporarily froze the date on U.S. coins and eliminated mint marks in a misguided attempt to make them unpalatable to collectors. As a result, even though they were dated 1964, the last circulating 90% silver coins were actually struck by the U.S. mint in 1966. During this same period, the U.S. government also introduced our current, execrable copper-nickel clad coinage.
Although it took a few years, silver coinage inexorably disappeared from circulation. Once it became impossible to find good collector's pieces in circulation anymore, interest in coin collecting gradually faded among younger generations. Although coin collecting was still popular in the 1970s and 1980s, the hobby was a shadow of its 1960s golden age.
By the 1990s, coin collecting had fallen on hard times. A bubble in third-party certified, or "slabbed" coins in the late 1980s had burst, devastating average collectors who had been sucked into it. At the same time, high quality, rare date coins from the 19th and early 20th century relentlessly rose in value, pricing collectors of modest means out of the high end of the market.
This unfortunate state of affairs only worsened in the early 2000s. By this time, the traditional hobby of coin collecting was clearly dying. The existing collector base was rapidly aging, most having started collecting during their childhood in the golden age of the 1960s. But there were almost no young coin collectors coming into the hobby to replace their graying ranks. This was at least partially due to the fact that, since the late 1960s, it was impossible to find desirable coins in circulation.
I got my start in coin collecting in the late 1980s and early 1990s. And I did so primarily by searching through rolls of half dollars and nickels for the odd, overlooked silver coin. Even back then, it was no easy task. Gresham's law had done its wicked work all too well over the decades. I did find a few silver pieces though - just enough to keep me coming back for more.
My entrance into the hobby of coin collecting was only possible because of the low prices of gold and silver during that time. However, in my opinion, the days of sifting through rolls of circulating coinage from your local bank in order to pick out a handful of worn silver specimens ended about 15 years ago. By the mid 2000s precious metals began to skyrocket in value, thus depriving aspiring young collectors of even this meager avenue of participation. It looked like the hobby of coin collecting was destined for extinction.
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But then a funny thing happened. Precious metal stacking, the name given to systematically buying physical gold or silver bullion for investment purposes, came to the rescue. In fact, I don't think it would be an exaggeration to say that precious metal stacking literally saved the hobby of coin collecting.
Precious metal stacking is the purchase of gold and silver purely for bullion purposes. But, a significant number of stackers inevitably became interested in the numismatic aspects of bullion coins issued by governments. This might sound like a contradiction, but some modern, government-issued bullion coins, with their beautiful designs and near-perfect strikes, really do possess great numismatic potential.
It is a short step from precious metal stacking to searching for semi-numismatic, certified MS-70 examples of American Silver Eagles or Australian Gold Kangaroos. From there, new collectors can branch out in many different directions. Some gravitate toward older proof coins with their deep mirror finishes and historical importance. Others look back to the classic early 20th century circulating U.S. coinage that inspired many of today's most popular bullion coin designs. Some branch into foreign coin collecting, drawn there by the plethora of attractive modern bullion coins struck by foreign governments. A few even look further back in time to the origins of coinage in medieval and ancient coins.
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Precious metal stacking has completely revived the coin collecting industry. Not long ago, numismatics was a slowly dying hobby dominated by older collectors who were chasing the coins they fondly remembered from their youth. Now it bustles with the activity of thousands of new precious metal stackers using gorgeous modern bullion issues as their gateway to further numismatic adventures. No, coin collecting today is not the same as it was in the 1960s, but it is still here and vibrant, thanks to precious metal stacking.