Are rare coins a good long term investment?

Since the U.S. Mint began issuing unique quarters for each of the 50 states a few years ago, coin dealers say there has been a surge of interest and hype surrounding numismatics, the fancy term for collecting and studying coins and paper money.

Collecting the state quarters circulating in the money supply is not likely to ever be very profitable, although there are some collectors speculating on certain rare state quarters such as “proofs,” which are coins made under unique conditions and with extra care to give them sharper detail than coins put into the money supply. You’re not likely to get one of these back as change at the newsstand.

When it comes to older collectible coins, from rare wheat pennies to Morgan silver dollars (named for the assistant engraver who designed it in 1878), there is money to be made, though the average returns are not as impressive as the stock market’s recent returns.

The Professional Coin Grading Service, a division of Collectors Universe, publishes several indexes of commonly traded coins. Its trademark index, the PCGS3000, is up about 3 percent over the past 12 months, up 13 percent since October 2003 and up 43 percent since December 1994.

By comparison, the Dow Jones industrial average is up about 15 percent in the last year, 22 percent since October 2003 and 218 percent since December 1994.

A look at a chart of the PCGS3000 shows a troubling spike in May of 1989, when the index hit an all-time high of 181,089 - almost three times its current level of about 67,000.

That spike was caused when Wall Street firms such as Merrill Lynch & Co. and Kidder, Peabody poured a lot of money into rare coins, only to pull out quickly when the market proved too thin to sustain the gains, according to Scott A. Travers, a New York coin dealer and author of “The Coin Collector’s Survival Manual” and other books on the subject.

Today, even though gold prices are approaching $600 an ounce and thereby lifting the intrinsic economic value of gold coins along with their value to collectors, many people are afraid to recommend coins as a long-term investment, said Travers.

“It’s a shame that it happened,” Travers said of the 1989 bubble. “If that hadn’t happened, we’d be in a totally different position today.”

According to Travers, there are three main types of risks involved in collecting coins, especially for novices. First is the acquisition risk, in which you pay too much for a coin. The second is the market price risk, in which the value of the coin goes down after you buy it. The third is the selling risk, when you might get tricked into selling the coin for less than what it’s worth.

Much of the acquisition and selling risk can be avoided by making sure you’re dealing with scrupulous dealers who are members of the American Numismatic Association and the Professional Numismatists Guild, Travers said.

It also is important to learn how to “grade” a coin - determine what condition it’s in - or else only buy coins certified by one of the top grading services.

If you’re willing to put in the time to educate yourself about how to grade and identify rare coins, it’s possible to find valuable ones by buying bags of unsorted coins from dealers - or even in your change jar.

Read the rest at the ABC News.