Specializing in comprehensive, strategic advice to family business owners, art collectors, numismatists and other owners of significant, illiquid and unique assets, I often find that a client-even if he or she is not a dedicated coin collector- will buy numismatic quality gold and silver coins after hearing or reading about a sale at auction for millions of dollars. For whatever reason, there seems to be a strong temptation for clients to think that collecting numismatics will be more valuable than investing in bullion. Recently, a member of a CEO group I belong to sent me this email: "Do you know anything about investing, buying and selling gold? Who to deal with? Etc.?"
That's a broad question, but I'll tell you what I told him. Basically, there are two ways of investing in gold that I would suggest. One is to buy an exchange-traded fund that holds gold directly, for example the Gold ETF (ticker symbol GLD). The other is to buy companies that mine and refine gold, such as Barrick Gold (ticker symbol ABX), which is a Canadian company but has mining and refining interest worldwide.
You can also buy gold coins. Here you are looking at either bullion (more recent coins that are minted solely for investment purposes and not to be circulated), or numismatics (older coins and coins minted to be circulated). This is much more risky, since tangible gold coins are not liquid and you need someone to help buy and sell them, as retail dealers will overcharge and underpay because they are usually catering to the collector rather than the investor.
As to how you invest in bullion or numismatics, I do this in the form of an investment fund so that the proceeds get taxed as long-term gains (15%) rather than as collectibles (28%) for federal purposes.
But be aware that there are risks when a significant part of an estate is in the physical form of gold coins, whether bullion or numismatics. Since they are tangible property, they are treated differently than liquid assets both for income and estate tax purposes. For example, gold, art and other tangible assets may not be used to fund certain types of trusts, such as some marital deduction trusts or charitable trusts under many circumstances.
Also, since they are illiquid, there can be significant premiums or commissions on the sale of the gold or other tangible assets, sometimes as high as 25% of the sale price.
Finally, the owner's specialized knowledge and interest of the market may not be shared by his survivors. This leaves open the possibility of having the tangible assets, such as numismatics, sold to a dealer or other buyer for a fraction of its true value.
A partial checklist for handling gold bullion or numismatics in estate planning is very similar to that of any estate planning where the client has significant tangible assets. Here are some considerations:
- Has a current inventory of the collection been conducted, including location, cost basis and description of the items?
- Does your client have a list of all of the significant contractual relationships with dealers and auction houses? Are any of the items on consignment for sale, or to be sold at auction, or on loan or display.
- Is the item featured in an article? If so, then copyrights might go with the item.
- Does the personal representative of the owner's estate know how to maintain and ultimately dispose of the items, or who to rely on to give a fair deal?
- Are the items properly and securely stored so they don't "walk off?"
- Are any of them going to be gifts? If so, these are very specific gifts, whether to individuals or charities, and any terms of any such gifts should be noted.
For more specific advice, if you are going to buy precious metals funds, some have suggested buying platinum exchange-traded funds-like PPLT- rather than gold ETFs because, as of this writing, gold was trading for $1,460 a troy ounce and platinum is trading for $1,784 per troy ounce. Historically, whenever the price of platinum is within $200 to $300 of gold, it means that gold is overpriced and platinum is underpriced. Also, some look for silver to outperform gold over the next two years.
This all may sound like old hat for some financial advisors. Investing in ETFs and gold mining stocks has been a good diversification move for a long time.
But what about these outsized returns you hear about for numismatics? When an ounce of gold is selling for millions of dollars just because of the rarity of the coin, does that mean it would be a better investment than bullion?
Maybe not. I collect numismatics-with help-for myself and as the trustee of the Kittredge Numismatic Foundation. My strategy is to buy "raw" coins out of estates or collections that I'm not advising, get them graded and slabbed and hold the key date coins for investments. (For the uninitiated, the key date is the coin with the lowest mintage for a given series.)
These are coins with very low mintages and they sell at premium because they are difficult to locate in any grade. In some cases, the key date coin will be an error coin. A particular mint error may have obtained such notoriety that collectors don't even consider the coin a necessary addition to complete their set. For instance, two famous examples are the 1955 Double Die Lincoln Cent and the 1937-D Three Legged Buffalo Nickel.
Most recent key dates have been special collectible coins issued by the mint, which had limited distribution or a low authorized mintage. A perfect example is the scarce 1995-W American Silver Eagle. Because these coins were only distributed as part of an expensive Proof Gold Eagle Set, very few of the coins were minted, creating a new modern rarity.
But a key gold coin does not always bring a reliable premium internal rate of return (IRR) over time to an investor.
Consider this example. The London Fix price of an ounce of gold from 2000 through 2010 grew from $284 to $1,412.
Now consider the actual auction results of a particular gold coin, a 1925 $20 St. Gaudens "Double Eagle" from 2000 to 2010. It also has one ounce of gold, but the price for this coin grew from $402,500 in October of 2001 to $1.9 million in November of 2005. And then it fell back to $1.5 million in January of 2010.
The ounce of gold in the 1925-Double Eagle in the second example netted the collector over $1 million between 2000 and 2010. The ounce of gold bullion in the first example, meanwhile, netted $1,128 over the same period of time.
Does that mean that the Double Eagle was a better investment? Not at all. The IRR for the double eagle was 15.7% over that 10-year period, while the IRR for the bullion was 17.4%. Clearly the bullion is the better investment.
If your clients are interested in owning numismatics because they enjoy owning and collecting coins-and if they are looking for decent return on their investments on the side-the best advice you may be able to give them is to associate themselves with an excellent coin dealer.
Matthew F. Erskine is principal of The Erskine Co.
in Worcester, Mass., offering expertise in the management
of unique family assets. He can be reached at www.erskineco.com.