Coins – For Collecting, Not Investing

I’m visiting my parents on Cape Cod this month. My father recently turned 90, and my mother decided to open the long-buried safe where my father kept his coin collection. This offered a brief moment of Geraldo Rivera-type drama. What treasures, buried for decades, would we discover? Tune in after the commercial break…

Ok! We’re back! And…

geraldo_al_capone_vault
Al Capone’s vault: also disappointing

The haul fills less than half a shoe box. Mom got a quote from their local coin and stamp shop. This long-buried treasure is worth $728. At least, that’s what the dealer would pay for it. Smaug’s glittering horde this is not.

For nerdy numismatists among you, I’ll briefly describe the coins: a ¼ ounce gold coin; an 1877 U.S. Trade Dollar; two Carson City Morgan Silver Dollars (uncirculated, 1883 and 1884), five Peace Dollars, circulated from 1891 to 1934; three Spanish Carolus III Reales, ranging from 1784 to 1806; and two French Indo-China coins, issued a little more than 100 years ago.

I spent some time trying to figure out how much this little collection would cost to accumulate today. I checked Ebay.com, but also specialist sites like Coinquest.comGreysheet.com and ApMex.com. And then some books I’m about to mention.

Peace_dollar
Peace Dollar

The collection would cost between $1,300 and $1,600 to put together.

In other words, the quote from the dealer is about half what it would cost to acquire the collection.

I bought two books at the dealer’s shop, a blue-covered  “Handbook of United States Coins 2021: The Official Blue Book 78th Edition”  and a red-covered “A Guide Book of United States Coins 2021: The Official Red Book 74th Edition.”

Both books have the same author and the same publisher. Both provide a comprehensive catalogue — lists upon lists upon lists — of coins and prices. They are basically the same book, with one crucial difference. One is for collectors (retail) while the other is for dealers (wholesale).

The issue comes down to what the finance world knows as the “Bid-Ask Spread.” In other words, the difference between how much retail purchasers pay to acquire the asset — the “ask”— and how much dealers will pay to take it off your hands — the “bid.”

Morgan_Dollar
This is what the uncirculated Morgan Dollar looks like

Comparing the blue and red books side by side is fun. It would cost you about $39 to acquire my father’s 1927 silver Peace Dollar (the ask.) But the dealer will pay just $21 for the same coin (the bid.) It would cost you about $210 to acquire my father’s 1884 Morgan dollar (the ask.) But the dealer would pay just $150 for the same coin.

Sometime in the 1980s, probably at the same time gold prices were rising rapidly, my father became interested in coins. A mania for precious metals and coins has long cursed unsophisticated financial minds, like my father’s, but interest spikes particularly in moments of increased fear — such as the recession in the early 1980s. And also after gold and silver increase rapidly in price. In other words, moments like this one. Which makes his lapses of financial judgment in the 1980s relevant for us in the 2020s.

The problem with coins as investments is not that they are inherently fraudulent, per se. The idea that a dealer will charge an extraordinarily large bid-ask spread is not the same as fraud. Bid-ask spreads, in many cases, are fine. The issue is a question of degree, as well as a question of unequal information. Smaller spreads are obviously better for the purchaser/investor/collector, while bigger spreads can be better for the dealer. Assets with a huge bid-ask spread, like collectible coins, become inappropriate in part because of their inefficiency in trades.

Unequal information about the bid-ask spread gets to the heart of where mere inefficiency slides gently, maybe imperceptibly, into fraud. If the purchaser/investor/collector does not know that a huge big-ask spread exists and likely will persist in the future, rendering the asset extremely inefficient, then we should worry about fraud.That was one of the issues in the multi-state enforcement action against precious metal marketing company Metals.com earlier this year. They targeted the credulous and frightened, mostly elderly conservatives who watch and read right-wing media, and mercilessly charged markups so large that they constituted fraud.

My father’s own coin collection, as it exists in 2020, I mostly consider harmless. I mean, it wasn’t a good investment. But there’s an aesthetic and maybe intellectual pleasure to collecting old things, and that’s fine. My view is that because of their historical and aesthetic significance, his coins are preferable to accumulating a thousand dollars’ worth of Beanie Babies. Although it is, admittedly, more difficult to hug coins than Beanie Babies.

Coins don’t work well as investments. But they are OK as collectibles, I guess, because people like what they like.

The details had been a bit lost in family history, but my mother told me that, in fact, my father and his business partner had been defrauded on coin investments in the 1980s. My father’s memory is not good anymore, so I called up his old partner, now 80, to find out more.

A well-trusted accountant had introduced them to a pension advisory group, which helped them invest some of the firm’s pension in rare coins, approximately $50,000 worth, according to my father’s partner. Around the time they figured out that a motel investment (also totally inappropriate for my father and his partner’s level of sophistication) had gone sideways, they were contacted by the state attorney general investigating their pension advisor.

Unsurprisingly, in the end, they had paid huge markups on their coins. My father’s partner estimated they took a 30 percent loss on that portion of the pension, in the course of cutting ties with the advisor. That actually sounds to me about what one would expect, even with no outright fraud. That’s pretty much just the bid-ask spread. The motel was a larger percentage loss on a bigger investment. In the end, employee pensions were made whole on the losses, but my father and his partner took losses in their own pensions — as the business owners who should have known better.

Seems about right.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Metals.com – The Long Con and The Short Con

Texas Bullion Depository – What Exactly Is The Point?

Never Buy Gold

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War on Cash or Privacy

pancakesI started thinking about the War on Cash recently over a giant plate full of butter, syrup, and pancakes.

You see, I spent part of my summer vacation in Gatlinburg, TN, which some think of as the jumping-off point to Great Smoky Mountains National Park, but I prefer to think of as the Pancake House capital of the world.

What microchip manufacturers are to Silicon Valley and M&A banks are to Wall Street, pancakes houses are to Gatlinburg, Tennessee. Swing a dead cat on the main drag and you’ll probably hit a pancake house.

Anyway, my family and I enjoyed a meal at the oldest pancake house in Gatlinburg and lo and behold, they only accept cash.

smoky_mountainsOne of the great benefits of visiting a cash-only pancake restaurant with your children is they might ask “why cash only?” and you might get to explain tax-evasion and money-laundering to your 7 and 12 year-olds. You see, sometimes dear, a nice pancake restaurant likes to under-report its sales, which allows them to under-report profits, which allows them to pay less in federal income tax. Or, sweet child, sometimes bad men with profits from illegal businesses like to “launder” their money by teaming up with a restaurant, which traditionally has a lot of cash transactions. You see, sweet pea, credit cards create a reportable electronic record and therefore less wiggle room to make up however much in legitimate profit a restaurant owner might want. More all-cash transactions means more room to cheat The Man. Pass the syrup when you’re done, love.

I should point out that even as I explained money laundering and tax evasion to my pre-teen children, I have no specific reason to think anything untoward happens at the specific restaurant we visited, only that they provided a nice learning opportunity to go with the meal, because of their unusual cash-only policy. And the pancakes were simply delicious.

Of course, the pendulum between cash-only and cash-less is swinging steadily towards cash-less. Despite the “self-reporting benefits” to a restaurant of an all-cash world, we’re more likely these days to experience cash-less transactions.

airplane
Do you take cash?

I remember just a decade ago one of my smart-ass friends used to facetiously ask at regular stores “Do you accept cash?” just to cause the double-take reaction at the checkout counter. With the swift evolution of technology and ubiquity of plastic and electronic transfers, however, that question becomes less goofy every year.

In fact, around 2009, first airlines and then other stores began refusing cash in favor of plastic, for both convenience and safety. Flight attendants presumably save time and hassle by not fishing around for exact change for our snack boxes and in-flight headphones.

Credit card companies have a clear vested interest in the payments war between cash and credit. Card companies like Visa, MasterCard and American Express charge venders hefty fees to accept cards at the same time that they charge us consumers high rates of interest if we carry a monthly balance.

Earlier this month Visa launched a direct assault on the use of cash, offering some restaurants a $10,000 incentive to go cash-less. The restaurants in this trial only qualify for the $10,000 payment if they refuse to accept cash from customers.

dsA business accepting credit cards pays an average of 2 percent in fees for credit card payments – an expensive proposition – in addition to the loss of “flexibility” with respect to reporting sales. Maybe $10,000 will be enough of an incentive from Visa to overcome these hurdles? Somehow I doubt that would be enough to entice my favorite pancake place in Gatlinburg.

While credit card companies have a clear stake in the move towards a cash-less society, so do governments. In November last year, the government of India instituted a sudden assault on cash transactions, specifically intending to combat tax evasion and money-laundering, by banning the use of “high” denomination bills, which included the 500 rupee and 1,000 rupee bill.

People and businesses who trafficked in bills with a face value at and above $7.70 (!) equivalent in rupees, according to the government’s theory, most probably are doing it to under-report income or to engage in illegal business. Holders of cash in India were given a very short window of time to deposit their bills into banks, thereby becoming visible and trackable to Indian financial authorities. The war on cash quickly hurt the Indian economy, and by June 2017 the government began to reissue and authorize larger cash denominations, a set-back in its war on cash.

cashIn the US, the government phased out high-denomination bills of $500, $1000, $5,000 and $10,000 back in 1969, as they realized these bills were rarely used, except by tax evaders and criminals. Last year prominent Harvard economist Kenneth Rogoff attacked the $100 bill as mostly useful for illegal activities, urging its banishment in his book The Curse Of Cash.

Despite Rogoff’s encouragements, cash seems unlikely to go away anytime soon – it’s still just too darn convenient. I’m sympathetic to the idea that where you fall on the cash vs. cash-less spectrum of preference might have something to do with how much you want to hide your economic activities from the government. On the other hand, a certain type of skeptic believes the move to cash-less transactions foretells a more authoritarian society, one less free from the prying eyes of big government in league with big banks. The War on Cash, in that alternative view, is really a War on Privacy. They have a point as well.

As for myself, of course I use electronic transfer services, credit and debit cards, and have happily experimented with money-transfer mobile payment apps like Venmo, SquareCash and ApplePay (although the latter seems rarely available at merchants in my part of the world). For small in-person payments, I tend to pay for everything with $2 bills, $1 coins, and Kennedy half-dollars, just to mess with merchants’ cash registers. But that remains mostly an affectation rather than a declaration of my relative criminality or privacy, or my stake in the ongoing war between cash-only and cash-less commerce.

 

A version of this ran in the San Antonio Express News and Houston Chronicle

Please see related post:

I have a thing about paying with $1 coins

 

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Seigniorage! A Senator Used the Word!

If you’re a dollar coin fetishist like me, you’ll enjoy this  funny Huffington Post article on Senator Vitter’s attempt to crush the dollar coin movement. In a delightful twist, the Senator even uses the word ‘seigniorage,’ and the article explains its meaning.

Caesars_Coin

It turns out Senator Vitter’s colleague Senator Enzi is actually a supporter of coins, so we have the makings of a showdown. This is fun.

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