Look what's beating stocks

By , Contributor to The Christian Science Monitor

A significant portion of Gene Sherman's wealth comes from old money, some that even dates back to the Roman era.

That's the advantage of coin collecting. You can pursue a hobby and get a start on building a fortune.

These days, that fortune is sparkling brightly.

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With general shakiness in the economy, some investors are bullish on coins because they are tangible assets that are not as susceptible to the same market pressures as stocks and bonds. The value of precious metals is up, an indication that the value of coins is on the rise. The CU3000 Rare Coin Index, meanwhile, has handily outperformed the stock market since the peak of the dotcom bubble five years ago.

The index, which measures the value of the 3,000 most actively traded coins, has increased about 20 percent over the past five years, while the Dow Jones Industrial Average has dropped more than 5 percent and the Standard & Poor's 500 index has declined at least 20 percent during the same period.

So is it time to dust off that old penny collection and get serious?

Opinions are divided.

"My wife feels this isn't the wisest investment," says Dr. Sherman, who lives in Palos Verdes, Calif., an exclusive seaside community south of Los Angeles. "But every coin in my collection is increasing in value, and I think coins are a hedge against inflation."

Even though more than 15 percent of his assets are tied up in coins, Sherman invests in coins for love of their beauty and history, not as a way to make money. Since there is no scientific method when it comes to determining the value of a coin, experts note, would-be collectors need to know what they're doing.

"To be a solid coin investor you have to bone up on the risks to avoid the swindlers," says Scott Travers, a New York City coin dealer and author of "How to Make Money in Coins Right Now."

There are three basic risks that every coin buyer needs to know, he says:

• Buy risk - The possibility of buying a coin for $1,000 when its actual value is significantly less.

• Marketplace risk - The possibility that your $1,000 coin loses value in a declining market.

• Sale risk - The potential of selling your $1,000 coin to an unscrupulous buyer for significantly less.

The coin must also be scrutinized for its level of preservation. The Professional Coin Grading Service, a subsidiary of Collectors Universe, determines this by assigning a number that ranges between 1 and 70, 1 being well-worn and 70 in a state of perfection. The Numismatic Guaranty Corporation of America is another popular grading service.

Mr. Travers says coins ranging between 63 and 67 generate the most controversy because they are in the greatest demand, while the grading process is highly subjective.

Supply and demand

The value of a coin is also determined by its scarcity and composition. The latter characteristic is one motive for the United States Mint to continue to tout its 22-karat American Eagle gold bullion program as an investment for consumers.

"And because we've seen the value of gold rising above $430 an ounce in the last two years, that bodes well for the rare-coin marketplace as well," says Travers, who recommends that people invest no more than 15 percent of their total assets in coins. "Yes, they can be very volatile. But we've been going through a bull market for several years and the economic justification [for coins] is strong precious metal prices."

Not everyone is bullish on bullion. Traditionally, gold has been a horrible investment, says Pedro Santa-Clara, a professor of finance at the University of California at Los Angeles Anderson School of Management. That's because it's expensive and doesn't do well when everything else is doing well. That could provide the basis for an argument in favor of investing in gold as a hedge against other investments.

"But when compared with investing in stocks and bonds over the last 30 years, gold has had dismal performance. And it's not really an economic asset," Dr. Santa-Clara adds. "When buying shares, you can hope for the prices of those shares to go up. You can't really hope for appreciating gold prices."

Santa-Clara also notes that central banks have been trying to get rid of gold because it has proven to be a poor long-term investment.

Regardless, gold is beautiful. At least, that's how the US Mint is describing its upcoming 24-karat gold collector proof coins. The investment coins are due out in 2006, with a potential global market estimated at $2.4 billion. Prices have yet to be set and are based on the London Bullion Market Association's going estimate for gold.

The US Mint currently produces a 22-karat gold bullion American Eagle series. The coins have face values of $5, $10, $25, and $50, but usually sell for several hundreds of dollars. In April, the $50 coin was selling for about $450.

There is no question that bullion is good business for the federal government, says Jay Johnson, a former Wisconsin congressman who served as director of the US Mint during the Clinton administration. Under his watch from May 2000 to August 2001, the US Mint generated about $2.6 billion, all of which went to the Treasury's coffer.

"When the US Mint profits, hopefully it keeps taxes down for everyone else. I just don't think the Senate and Congress see the US Mint as a priority for making money," says Mr. Johnson, noting that it costs about 22.5 cents to make a golden dollar, and 12 cents to make a quarter. "That's a pretty nice profit margin for the Mint."

Not for nickel-and-dimers

Investors who have enough money to buy and sell a substantial amount of coins also have the potential to profit nicely. Silvano DiGenova, chief executive officer of Superior Galleries in Beverly Hills, Calif., doesn't believe anyone should make a true investment in coins with less than $10,000. The reason: Coins that are worth the investment can cost several thousand dollars apiece.

For example, a gold coin from the early 19th century can run about $6,000. But Mr. DiGenova expects the coin to nearly double in value in three to five years.

"People also have to remember that coins aren't as liquid as stocks and bonds. And some clients put half their net worth into coins," says DiGenova, who started collecting pennies more than three decades ago.

Sherman's favorite coin is a penny from 1793. Though its condition is crude at best, Sherman says he can make out an interlocking chain on the back of the coin. "And each link in the chain stands for the colonies that linked together to make up this country."

Estimates of such a coin's value range from hundreds of dollars to several thousand depending on its level of preservation.

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