Rare Coins – The Journey from Disinflation to Inflation

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Inflation will rise with Donald Trump as the President of the United States.  The rare coin market typically rises during times when there is inflation.  Because of this, rare coins are the best hedge against inflation. 

In its report on December 16, 2016, the influential Bank Credit Analyst had the following to say about inflation:

“The 35-year bond bull market is over.  Deep-seated political and economic forces will conspire to lift inflation over the coming year.”

Perhaps most importantly, tax cuts and infrastructure spending planned by President-elect Donald Trump will constitute a major fiscal stimulus that will lift economic growth and inflation.  Mr. Trump campaigned on promises to cut taxes, increase infrastructure spending and roll back financial regulations.  Higher stock prices, rising longer-term interest rates and the strengthening of the dollar since his election signaled that the markets expect his administration to spur faster expansion.  Moreover, inflation rose at the fastest rate in more than three years in December. 

Inflationary pressures are already showing themselves, including a significant rebound in some commodity prices.  For example, the sharp rise in coal and iron-ore prices has altered the fortunes of the mining industry significantly.

Central banks around the world are actively trying to push inflation higher.  As a result, markets have begun shifting their focus toward the risk of rising prices, after several years – eight to be exact – dominated by fears of falling prices, or deflation.

According to a recent article in The Wall Street Journal, demand is rising for a broad swath of financial assets that typically gain ground when consumer prices are rising or expected to rise.  Central banks are now openly entertaining, and even welcoming, inflation bubbling over 2%, which isn’t bad news.  To the contrary, markets and central banks alike will be relieved that the world is no longer skirting a deflationary abyss.

How certain can you be about the relationship between fiscal stimulus to come and a robust rare coin market?  “After several years of higher prices and the spectacular sales of several legendary coin collections, the U.S. rare coin market softened in 2016.  But, after the November election, there was a notable increase in demand for high-quality rare coins, including those priced at $100,000 or more.” (PNG Market Survey)

“The correlation between the return on coins with inflation over the last 37 years is well above that of other assets considered including gold…When inflation turns up, the responsive increase in rare coin prices could well be quicker and larger than the returns of most other assets.”(“The Investment Performance of U.S. Rare Coins by Raymond E. Lombra, Ph.D.”)

Remember also, that the Trump presidency is likely to be very favorable to the tax rates of high net worth individuals, constituting a huge part of our market.  Gold is good, but rare coins are an even better hedge against inflation than gold and much better than stocks and Treasury Bonds.(“The Investment Performance of U.S. Rare Coins by Raymond E. Lombra, Ph.D.”)   

Gold is good, but collectibles such as rare coins are doing an even better job of preserving and growing wealth.  The latest Knight Frank Wealth Report for 2016 confirms that ultra-high-net worth individuals prefer collectibles to bullion.

How have the rare coin assets reacted during the past eight years, when inflation has been only a distant memory?  Rare coins have increased in value in nine of the last ten years, despite the fact that, from an investment standpoint, rare coins are considered to be primarily a hedge against inflation.  Rare coins’ performance throughout this eight-year period shows the strength of a market that can flourish even under adverse circumstances, in large part because of the strength of its collector base.

Moving forward, for those clients who believe that gold and rare coins always act in lockstep, an example given by the Lombra Report shows the sharp, cumulative drop in gold prices in 2013-15 (approximately 40%) as opposed to the 6% gain in value in rare coins during that same period.  After several years dominated by fears of falling prices, or deflation, there are signs we are finally going to experience significant inflation again.  With inflation comes higher rare coin values.