Coins, asset protection and wealth preservation

[jwither 11]

"I live in a very different country to you.We have a government that is unashamedly corrupt and has not yet been testedand voted out of power at the ballot box by a strong opposition. Impressionsare that fraud and or violence will keep them in power. High value coins withthird party grading are one way of holding assets. If you find our high endprices unrealistic then hear what I say. Perhaps your native Bolivia from whereyou come from has a similar background to us."

 

The above is an extract from a prior post in "Scarce Coin Watch". I am not providing this reply specifically to this quote, but to anyone who agrees with this claim and uses this belief for the same apparent reason. The claim being that coins are an effective asset protection option and wealth preservation asset.

First, to my knowledge, I am not aware anyone buys coins for this reason in another country with similar political or economic dynamics to South Africa, except maybe China. To comment on Bolivia where these dynamics do not remotely apply, there is no organized collecting at all, so I know it isn’t going to be done there. I don’t believe anyone in Bolivia uses collectibles as a store of value at all for the same reason. They own metals in non-bullion form (such as jewelry) but to my knowledge, none of these items have a collectible premium either.

 

Second, as I have explained before, coins and other collectibles aren’t effective at mitigating this risk. This claim has been used on multiple prior occasions on this forum but the question I have is, how exactly does anyone who agrees with this position expect coins to serve this purpose effectively?

 

I already acknowledged that as a physical asset, they are not associated with the financial system but this only matters to those who are worried about default (covered later below), taxation or expropriation.

 

From a tax aspect, its easy enough for the South African government to tax coin sales except private transactions should they choose to do so. To my knowledge, coins are exempt from capital gains tax in South Africa but if not, there are better tax avoidance or evasion strategies anyway.

 

For anyone who buys coins due to fears of expropriation, the far more sensible strategy is to send at least some of their assets out of the country. Asset protection is primarily a function of the political jurisdiction where the assets are located, not the asset class.

 

Except in isolation or the most unusual circumstances, I don’t see any government ever bothering to confiscate coins because it isn’t worth the effort. However, as I stated previously, if any of you are worried about a “Zimbabwe repeat”, to be placed in a position where you are forced to liquidate your collection under emergency circumstances is likely to result in a fire sale at cents on the Rand, USD or whatever your currency of reference happens to be.

 

I also wouldn’t count on being able to smuggle them out of the country. Even under the assumption this is successful, the more likely outcome under a “Zimbabwe scenario” is the market price of both ZAR and Union will fall substantially (yes, from current “low” levels) for the obvious reason the primary market will mostly cease to exist at anywhere near the prior price. I have already explained to everyone here that disproportionately, there is no market for these coins at (anywhere near) local prices elsewhere above a nominal price, just as there isn’t for US coins at US prices outside the United States. Most Bolivian coins sell for very low prices because most foreigners aren’t interested in most of them and there are no buyers locally.

 

The only reason foreign buyers (including South African expatriates) buy ZAR and Union coins anywhere near your local prices is because buyers in your country have the most influence on the market price and are the primary source of demand. Given the spreads between BoB and sales everywhere else, foreigners (including expatriates) are buying most of their South African coins at discounts to prices in South Africa, but much smaller ones than they would pay otherwise because they are still competing against one of you. Where foreign buyers do not compete against one of you, the result will be my experience up to 2010 and I have already provided many examples which demonstrate that I bought many coins for a pittance compared to your local prices. This is invariably true of practically any coin with the primary exceptions being those I included in my recent topic, such as ancient Greece and Rome which have a true international market. South African coins above a nominal price don’t have a real international market and neither do those from the United States.

Edited April 17, 2015 by jwither

[jwither 11]

Part 2

 

As examples only, the most logical reason why coins from Southern Rhodesia and probably modern Greek coins have (mostly) held their value is because most demand comes from elsewhere, not locally. I don’t believe there is any demand of substance in Zimbabewe for Southern Rhodesia. For modern Greek coins (post 1820), I am not familiar with local collecting but its evident to me that proportinately the demand from elsewhere is significant enough to maintain “high prices” for many of these coins. So while I have never tracked prices for any specific coin over time, this explains why the recent Greek economic crisis hasn’t resulted in a price collapse in this series. The obvious evidence I presented in my prior topic on foreign demand for expensive ZAR makes it evident that this does not apply to either ZAR or Union. It is a combination of the higher price level and probably also the collecting culture among foreigners with a Greek family heritage.

 

How much do any of you believe the “best” ZAR or Union would sell elsewhere if your local market practically disappeared? How much do you believe the most expensive US coins would sell at auction with few or no US bidders and essentially no prospects for a subsequent sale to an American collector? My guess for US coins is likely less than 1% of current value. For Union and ZAR, usually less than 5% of current value for the most expensive to maybe as much as 25% for cheaper but still high quality coins. These estimates are with TPG. Without TPG, I expect even less.

 

Lastly, as a wealth preservation vehicle, those who agree with these sentiments have a completely different definition of “wealth preservation” than I do. The only reason I can possibly see why anyone would ever believe this is because they concurrently believe they can speculate (aka, “invest”) with them to make a profit. However, this is speculation and not wealth presevation.

 

To anticipate a future reply to these comments or those I have made in the past, “eventually”, Union and ZAR will increase in price substantially, whether from near current or (much) lower prices. But regardless of when this happens, from what level and the next price peak, this won’t negate any claim I make here. It will only prove that enough buyers decided to pay the future price, whether as a collector or more likely, as an “investor”.

 

The most effective wealth preservation assets are those which are both most likely to hold their value over time and are concurrently liquid. This is my definition and of the SafeWealth Group. No coin except gold and silver bullion substitutes selling for nominal premiums over melt value remotely meet either of these criteria.

 

First, coins aren’t an inflation hedge even though many in South Africa presumably believe it, just as in the United States. This supposed hedge does vary depending upon the currency of reference, but in South Africa, there has been some price inflation since YE 2011 after which most ZAR and Union either declined in price or collapsed. Likewise, prior to maybe 1998 or at most 1995 after the change in government, I am not aware most of these coins kept up with the decline in the foreign exchange value of the Rand or price changes. I have no specifics, so if anyone knows otherwise, they can provide the data.

 

The primary reasons they exploded up to YE 2011 isn’t because they were or are an inflation hedge, provided asset protection or are a wealth preservation asset but 1) A ONE TIME “reset” due to a perception change after apartheid ended which will never be repeated. This is an assumption of mine for ZAR since I presume more foreign buyers bought them up to maybe 2002 since they were so much cheaper. But even if foreigners did not, I still believe this occurred within South Africa. 2) TPG which had the same impact in the US and has for all other coins where this buying has any critical scale and turned collecting into “investing”. This is substantially also a one time event, regardless of the coinage. 3) Disproportionate speculation in both ZAR and Union which coincided with the mania in the Mandela issues.

 

Second, all coins selling at substantial premiums to their metal content are susceptible to a price collapse under actual adverse economic conditions. I make this statement in opposition to those who believe the mostly imaginary “hard times” since the 2008 financial crisis prove otherwise. It should be evident since the 2011 YE peak, most ZAR and Union coins have not held their value and neither did the US coins which were subject to the speculative bubble in the late 1980’s. Many of the latter still sell for less today.

 

Third, coins are not subject to direct default as are financial assets but this still doesn’t make them an effective wealth preservation asset because they are actually a luxury collectible trinket which no one needs for any purpose. I grant they will always retain some value if for no other reason from the metal content but their current values are primarily the result of general economic prosperity and in the recent past, the unprecedented worldwide financial mania. This is why prices are so inflated versus the past.

Edited April 17, 2015 by jwither

[jwither 11]

Part 3

 

Fourth, few coins have any liquidity including most ZAR or Union, especially those worth over $10,000 USD profiled in my prior post. In this other post, I estimated 25 to 40 buyers exist today for the approximately 250 ZAR currently in the census, excluding the veld and Burgess ponds. Adding Union and RSA, maybe up to 50 potential buyers for 300 coins. These estimates are in “normal” markets which by my definition is better reflected today in contrast to pre-2012 which I classify as a bubble. For these coins and most others, there are anywhere from a handfull to a few more actively competing for any coin at its“real” value when it comes up for sale. What kind of “liquidity” is that?

 

Fifth, for anything to function effectively as a wealth preservation asset, it must be “reasonably”priced. The idea most of the more expensive coins profiled by others (aside from me) on this forum are reasonably priced when they sell for such huge multiples to those in slightly lower grades is unsubstantiated by their actual merits and isn’t remotely supported by anything in coin collecting anywhere. The idea any asset which is so relatively overpriced “preserves wealth” is nonsensical. For any asset to preserve wealth (as opposed to being used as a form of future speculation) implies that it is “reasonably” priced. These coins aren’t “reasonably” priced any more than many in the United States which aren’t effective for this purpose either.

 

In conclusion, the very limited number of buyers is the root cause behind the wide price variations for any of the more expensive Union (especially) and ZAR from one sale to the next. By any common sense definition, no asset which fluctuates as wildly in price as most expensive Union and ZAR do can be considered liquid without making the term a complete farce. Liquidity means being able to transact on short notice at close to current fair market value, and not just once or on occasion but repeatedly. From a wealth preservation perspective, store of value doesn’t mean an asset retains some value, but most of it when you actually need it. Neither remotely exists with “investment” coins from anywhere. And since it does not, this is why coins are not a wealth preservation asset.

Edited April 17, 2015 by jwither