Author Topic: Gold hit $1300, so what happens next in the coin market? Poor liquidity! Yay!  (Read 912 times)

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Offline badon



Usually precious metals bull markets are ahead of numismatic bull markets. A typical sequence of events is, at first the precious metals steal the spotlight and get all the attention, with a modest amount of new excitement in coin markets. Then, when the precious metals crash, the coin markets go wild as all the precious metals market money goes into other alternative hard assets. For people who like investing in precious metals, numismatic coins are the obvious next choice, but art and other collectible hard assets (diamonds, wine, antiques, etc) tend to do well too.

The coins tend to be the most stable and predictable of the available choices, with the perfect mix of poor liquidity AND commodity-like price awareness (charts etc). Although poor liquidity is usually a negative factor in any kind of investment, it does play a positive role in collectible investments like coins. Among coin collectors, poor liquidity is nothing to worry about because collectors love their coins, and they do not want to sell them - unless they upgrade. That means collector of investment-quality coins is typically also BUYING at the same time he's selling! That helps to keep prices up and in the headlines for the rare coins, even after all the bull market hard asset excitement has passed. The coins will still be setting newsworthy price records because the buyers and sellers of high-end investment grade coins are putting more money into the market than they're taking out.

The impressive market activity of elite coin collectors doesn't always go unnoticed to people outside of the sphere of influence of the precious metals and other hard asset markets. Eventually, the coins end up getting attention from people who know about the good price performance of rare coin investments, but do not know about the poor liquidity. Everyone eventually learns when they try to sell, and that's pretty sad because then they become frustrated and doubtful about even the best of coin investments. If they panic and they don't own elite level coins that are too rare to sell rapidly, it's possible for those people to crash in the coin market, even though it's normally resistant to crashes. But, that's only for coins that aren't rare.

Even in the worst of times, like a coin market crash, the truly rare and desirable coins will drop less and recover much more quickly than any other hard asset or collectible investment. The only reason it can happen at all for the rare coins is because of all the hot-money coming from newcomers with no experience with coin investing, and no awareness of the poor liquidity of collectibles like coins. One of my objectives is to make people aware of the poor liquidity of the coin market, so people come into it fully informed.

Really, poor liquidity is the only major downside to coin investing compared to precious metals, but for a person who has the patience to wait for the right buyer, poor liquidity is not a problem. In other words, long term coin investors are the only kind that can be consistently successful. That's fundamentally why the best coin investors are the collectors! That's also fundamentally why my oft-quoted advice to "buy what you like" actually works, despite it's ridiculous simplicity. If newcomers learn this in the beginning, they're much less likely to cause a coin market crash.

Don't invest in coins if you "plan" to sell them. Instead, invest in coins you like, and buy them because you want to keep them. Then, sell them when you upgrade or change your collecting interests. That's a formula that always works. An experienced collector or investor will be more capable of straying from that formula, but for newcomers, you need to think like a collector if you want to succeed as an investor. After you become an experienced collector or investor, then you're ready to consider becoming a dealer. Dealers are the only people in the coin market who earn their profits from rapid sales in a market known for poor liquidity.

The only reason dealers are able to succeed with rapid sales in an illiquid market is because they know the market better than the collectors and investors do. Plus, they're willing to exchange their labor for profits, instead of time. Basically, they're serving the needs of collectors and investors, who invest with time, but not labor. Both collectors and investors must invest money, but the dealers are forced to invest more money than anyone else in the coin markets, which actually worsens the poor liquidity challenges they must solve to succeed.

Even if they succeed, coin dealers tend to have unimpressive incomes, despite their impressive coin inventories. It's not unusual for a coin dealer to have millions of dollars tied up in an inventory that sells so infrequently, they must maintain another job just to stay in business. This is true for any business in a "fun" or "hobby" market. It's the competition that makes being a coin dealer so difficult, because it reduces profit margins. Slim profit margins combined with poor liquidity? No thanks, I prefer to be a collector/investor, and so should you.

Be grateful for your coin dealers. This is a tough business to be in, and they're doing us a favor. Nobody loses more money than a coin dealer when the coin market experiences a pullback. I have seen some pretty awful situations that the dealers can get into. Meanwhile, collectors like myself don't care if the market is down, and I'm actually pleased to be able to buy the coins I want at lower prices, because it just enhances the profits I eventually get.

It's a bizarre feeling to be wading through a bloodbath in the coin market, when I'm not even getting wet. That's the upside to poor liquidity for an investor who thinks like a collector.