To the experienced rare coin investor the recent market activity might seem a bit anticlimactic. After all, the coin bulls have been saying for more than a few years now that prices have to go higher because the “stuff” just isn’t out there any more. We must admit that even though we consider ourselves in that corner we still get surprised when our predictions come true.

So it’s all together appropriate that we go back and review our thinking about the rare coin market from just a few years ago. Remember, at that time gold was trading in the mid $300’s and America was about to go to war. The Enron scandal was unfolding as investors were fleeing the stock market in droves. All of a sudden individuals began looking for other ways to invest their money. Real estate had become extremely popular as mortgage interest rates fell to below 6 percent. Other commodities such as energy and metals began to benefit from overseas emerging markets and recover from their depressed prices of the 1990’s. Financial experts began broadcasting that the entire range of commodities was now in a commercial bull market. At the same time the prices of many US coin series were just beginning to break out of a flat ten year base. During that time there was very little volatility among the more popular coin series. Generic issues were plentiful as we were awash in both Morgan Silver Dollar Rolls and common $20 Gold pieces. Excitement was centered on the new US Mint programs like the Commemorative State Quarters and the Bicentennial Jefferson Nickel. Due to the many promotions and wide coverage they had acquired a large audience, some say around 20 million collectors.

Gold, which has always been a kind of barometer for the coin market, had just started to attract attention as it crossed the $400 per ounce threshold. Gold is one of twenty-two commodities that trade on the NYMEX. To put the volume of gold trading in perspective, on a typical day the trading in gold is less than the trading in any one of the DOW Index component stocks. You see we suspect that for a very long time the price of gold had been artificially depressed by the commercial producers and the central banks. One reason was because the annual gold production had been leveraged by the mining companies through hedging. The mines would typically sell their future production in order to lock in a profit whenever the current price was favorable to them. By keeping this hedging strategy in place the mines were working against their long term interests. Whenever gold would begin to break out and attempt a rally, the mines would dump their future production onto the market, reversing any gains. Central banks pretty much did the same with their gold reserves. They would sell into a rally, causing prices to fall. From the banks’ point of view, a lower gold price made their currencies appear strong.

However $400 gold changed that thinking and the market has been rallying ever since. The mines have stopped hedging their gold and the banks have sold off all or most of their gold reserves. In addition gold prices got a boost from the new gold ETF (exchange traded fund, see chart), which began trading on the NYSE in November, 2004. Each share of this new fund is equal to 1/10th of an ounce of gold. The fund purchases the gold as needed and warehouses it for the shareholders. The value of each share in the fund exactly mirrors the price movements of gold. So for the first time in history both individuals and institutions can now buy gold without having to take delivery. As of this writing silver investors are bracing for the inauguration of the silver ETF. Speculators, in anticipation of an increase in trading volume, have helped move the price of silver above $14, a 25 year high. Many expect the silver ETF to help propel silver above $20 within the next year.

Generally speaking coins have never reacted in tandem with other markets except gold and silver. We believe that coins will continue to remain unique even when compared to other collectibles. Coins are the only collectible that incorporates all of the following: high rarity, easy to transport, easy to liquidate, easy to evaluate, historically valuable, artistically valuable, condition certified, intrinsically valuable and also non-perishable. Nothing else comes close to coins.

The supply of better coins has never been as thin as it is right now. Just take Morgan Dollars. There was a time when most dates were available in either bag or multi roll quantities, with just a few rare exceptions. Now even common dates are becoming extinct. For perhaps the very first time the demand for common coins is outpacing the supply.

As dealers we continue to find the coin market very competitive when it comes to acquiring new material. Throughout the year we attend most major trade conventions and auctions in an effort to find the best items for our clients. Unless there is an increase in the available supply, either through liquidations or from new discoveries, we fully expect the coin market to remain tight. As a result we intend to double our efforts to accumulate inventory by attending more shows and auctions over the next year.

So as you can see the momentum behind the rise in coin prices is considerable. Looking back over past bull markets we do not recall ever seeing all the indicators lined up as they are today. Along with precious metals moving higher the US dollar has started to move lower against other currencies even before interest rates have stabilized. This should continue to help sustain the bull market in commodities like gold and silver which are priced in dollars but traded worldwide.

Finally we continue to see consolidation in the coin industry as some of the larger companies position themselves to compete with each other for better access to professional investors and institutional buyers. Success at the high end of the market was at one time enjoyed by companies with the best reputations and contacts. But as prices have accelerated to the upside many firms have been unable to keep pace with demand. That is why several companies look to improve their position in the industry by acquiring the staff and client bases of smaller firms. Just as the big financial houses have expanded their services to include investment banking, retail brokerage, real estate mortgages, etc., so the large rare coin dealerships are trying to grow by acquiring auction companies, mail order firms, and retail brokers.

Here at Eastern Numismatics our staff and client base has again increased considerably over the past year and we expect that the pace of growth will continue into the foreseeable future. Our emphasis has always been focused on the needs and concerns of the individual investor and collector, and that is where we will continue to direct our efforts.