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przemyslaw-radomski

Are numismatic coins better than junk coins?

February 3, 2010, 12:00 PM Przemysław Radomski , CFA

My friends keep telling me that I should sell my beautiful numismatic gold and silver coins and buy bars and junk coins instead. They tell me that my numismatic holdings will not appreciate as much as other forms of precious metals. Is that true? How could it be - won't people value the top-quality bullion more and price it higher than ordinary bars or junk coins?

They will, but that is not the point. The thing that should matter to you is how much will you gain, not what will be priced higher in the end. These are two different things, as each trade has the purchase price and the sell price. The price at which you will sell you holdings will most likely be higher for numismatic coins, given that they have the same amount of gold/silver in them as their 'junk' counterpart). However, virtually in all cases the price that you originally had to pay for the same amount of gold/silver that this coin contains, will be much higher for your numismatic coins.

How come? The value of your numismatic coin can be divided into two aspects: the value of the metal itself and the rest. The rest includes the minting costs, the numismatic value, etc. If you want to profit on the rise of the price of the precious metals, you want to purchase the metal, which will appreciate, not 'the rest'. If you want the value of your coin to rise at the same pace as gold and silver do, you would need to have minting costs and the numismatic value to rise at the same pace, as gold and silver. There is no reason to believe that the numismatic value of your coins will do that. Naturally, you cannot avoid paying the minting costs, but you can minimize the numismatic factor.

Here's the math:

Coin's value = metal value + numismatic value + other costs

1. Gold at $800, numismatic value = $600, other costs = $100

Numismatic coin's value = $800 + $600 + $100 = $1500

'Junk' coin's value = $800 + $100 = $900

2. Gold at $2000, numismatic value = $600, other costs = $100

Numismatic coin's value = $2000 + $600 + $100 = $2700

'Junk' coin's value = $2000 + $100 = $2100

Profit on numismatic coin = $2700 / $1500 - 1 = 80%
Profit on 'junk' coin = $2100 / $900 - 1 = 133%

Clearly the smaller the numismatic value is, the higher the profits are. In fact, numismatic coins decrease your exposure and leverage to precious metals.

Here's another example:

You have two stocks: and one is worth $1 today (highly leveraged), and the other one is worth $100. You know that a year from now the first stock will cost $50, and the second one will be worth $150. Which one would you rather buy? Of course - the first one, as its value will increase 50x (5000% - !!!), while the value of the second stock will increase only 1,5x (50%). At the same time we see that the second stock is still priced higher, but that fact has no direct influence on your profits.

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Dear Sunshine Profits,

gold and silver investors
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