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Are Rare Coins Part Of Your Gold Diversification Strategy?

Commentaries & Views

The case for diversifying your portfolio with gold is clear. Numerous studies reveal that a gold allocation up to 10 percent can smooth out overall portfolio volatility and improve long-term returns.

Non-correlated assets are an essential feature of successful portfolio diversification and gold performance reveals a negative correlation to stocks, especially during bear markets. In recent decades, gold has produced the highest level of returns when the stock market is in a bear cycle.

Since 1968, the average gold return was +14.2%
when the S&P 500 Index fell by more than 20%.

The Next Level of Diversification

Within the physical gold and silver world, there are additional layers of diversification opportunity. Expanding your physical holdings into rare coins could offer increased levels of safety and the potential for even greater price appreciation.

While gold bullion or a typical Gold American Eagle coin tends to track the underlying price of gold higher and lower, rare coins can trade at a premium to spot gold. High quality rare coins, or numismatics, have outperformed the price of gold over the past 38 years, according to an academic study by economics Professor Raymond Lombra at Penn State University.

Here's what Lombra found:

Average Annual Return 1979-2016

Stocks 12.6%
Treasury Bonds 8.0%
Gold bullion 5.2%
Coins (all types – MS65) 11.0%
Coins (all types – MS63-65) 9.3%

New Demand Source Since 2008 Crisis
The rise of Family Offices as an investment force is becoming increasingly known. These family offices, who manage assets for ultra-high-net-worth individuals have turned to both the gold bullion and rare coin market post-2008 global financial crisis in attempt to diversify away from paper investments and to preserve and grow capital.

Early U.S. gold coins have a dual capital appreciation stream. First the high gold content level support gains amid rising gold price periods. Second, the premium to gold bullion can escalate dramatically amid the unchanging supply level and increased demand, which is notably emerging from a new crop of buyers in recent years, namely family offices.

History of Gold Ownership in America

Many gold investors are aware of the events that led up to the dramatic decision in 1933 for President Franklin Roosevelt to suspend the U.S. gold standard.

This occurred after a financial crisis triggered Americans to rush to Federal Reserve banks to exchange their paper money for gold.  In March 1933, the Federal Reserve Bank of New York could no longer honor its commitment to convert U.S. paper money to gold and President Franklin Roosevelt was forced to declare a banking holiday. From there, FDR issued the now infamous Executive Order, which demonetized gold and required Americans to surrender all gold to a Federal Reserve Bank.

The Rare Coin Exemption

The Secretary of the Treasury William Woodin was an avid coin collector and is credited for supporting the exception of rare and unusual coins. At that time, Americans were allowed to keep rare and unusual gold coins of "recognizable numismatic value" or collector's items. The provision specified that gold coins minted prior to April 5, 1933 were considered to be of special numismatic value.

From that period forward, Americans were prohibited from owing gold coins and bullion, although jewelry was allowed, until 1974 when Congress once again legalized private gold ownership in the U.S.

Rare coins can provide both additional layers of safety and opportunity for capital appreciation. What's in your portfolio now?

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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