Y2K and the Coin Market

Each month, I buy coins from Bill Bradford’s coin business. I do not buy them as an investment… but as a hedge against investments. I intend to dole them out to my grandchildren if I am lucky enough to live long enough to have grandchildren. Nothing in this life is guaranteed—which is precisely why I buy gold. It is a good thing to have on hand for unforeseen emergencies.

Plus, it has a calming effect on me. Stock certificates make me nervous. They remind me of obligations… risks… work… danger… markets. Will they go up in value… or down? Have I read the latest statement… have I checked the news? Is the company still in business?

Real estate makes me anxious too.

Roofs… tenants… taxes… cash flow… maintenance… We rent out an apartment on the farm in Maryland. When I looked at it, I noticed that the air conditioner was sweating. Drops of water formed on the bottom… and dripped down onto the wooden supports… and then onto the floor. None of
this wood was treated. It will all rot. I will think about it once a month or so for the next two years. This thought is like an annoying virus on your computer… a message that keeps popping up and reminding you not to relax.

Gold, on the other hand, is trouble free. It requires no maintenance… and no attention. It is the cause of no anxiety, and the cure for quite a few.

One source of anxiety in search of a cure has been the Y2K fear. I buy French 20-franc pieces… because prices of these coins were not driven up by people seeking to protect themselves against Y2K. In fact, the premiums on certain coins are probably a good measure of the level of anxiety over Y2K. So, I asked Bill about the state of the coin market:

“The rare coin market is a bit nebulous. I’ve tracked wholesale prices of a market basket of coins usually recommended by my competitors (i.e. MS-63 to MS-65 U.S. coins) since 1989. Based on a number of factors, I called a bottom in April 98 and since then the market has moved upward, though not terrible sharply, at least it has according to my indices.

[Bill publishes his indices—and usually discusses them and the direction of the rare coin market—in each issue of his letter.]

“The Y2K market peaked in early April and then disappeared almost instantly. Will Y2K demand will rise sharply again?I doubt that it will, but it’s always possible.

“Here is what I wrote in my May letter (I do not include the graph):

‘Y2K: The Bubble Bursts . . .

‘I reported a month ago that the Y2K panic had pretty well played itself out, and things haven¹t changed since. I keep track of the impact of Y2K panic on the metals market by following monthly sales of the 1/10 American Gold Eagle. My reason is simple: the 1/10 Eagle is heavily recommended by Y2K gurus.

‘The graph at the bottom of this page tracks net 1/10 Gold Eagle sales since January 1992. As you can see, sales tend to rise in December of each year, because of demand for the inexpensive coin as a holiday gift. Aside from that seasonal pattern, demand has been pretty flat, with monthly sales less than 50,000 (except December) until April 1998 when Y2K panic began in earnest. By August, monthly sales topped 250,000. And by September, total sales for the year had broken the old record of 915,000 coins sold in 1986, the first year of issue.

‘The only aberration is for sales in February of this year, when the mint was unable to fill orders as a result of its stupidly underestimating demand and not ordering enough coin blanks from the private firm that manufactures them. As a result of this temporary shortage, the price of 1/10 Eagles rose sharply in February, with trades taking place at premiums as high as 25% or more. Happily, I warned readers of this letter at the time that the shortage would be short-lived and recommended postponing any purchases of 1/10 Eagles until it passed.

‘As I’ve written before in these pages, I don’t think it’s likely that we’ll have a crisis of serious proportions as a result of the Y2K problem. But there is at east some possibility of such a crisis, and a prudent person should prepare for it, just as a prudent person prepares for the possibility of his house burning down (by purchasing fire insurance) even though he doesn’t think it will likely happen.

‘What’s important in making your preparations for Y2K is to avoid the coins recommended by self-proclaimed Y2K experts. These “experts” have enormous influence over unsophisticated investors, who tend to buy only the items recommended to them without paying any attention to what sort of price they’re paying. As a result, they still bought 1/10 American Eagles in February, when they were priced at 25% over gold value rather than their customary price of around 11% over gold value.
The huge demand from these unsophisticated investors has resulted in huge increases in the production of current bullion coins like the Maple Leaf and the American Eagle. Once the Y2K crisis blows over, these coins will be liquidated, resulting most likely in a substantial decline in price relative to bullion.

‘Y2K buyers also drove up the price of 90% U.S. silver coin, U.S. Silver Dollars and even some of the commoner classic U.S. gold coins (mostly $20 gold pieces). Premiums commanded by these items have begun to decline; in fact, they’ve declined so far that they may very well be sensible investments again. But before discussing the particulars of what makes sense to buy right now, I want to spent a paragraph or two on a more important question:

‘Will the Y2K Bubble Inflate Again?

‘That’s a very good question. Public discussion of the Y2K problem peaked in January, when the major news media picked up the story. Y2K induced demand lasted through March and has declined since. But there are seven months between now and when the Y2K crisis if any will occur. That’s plenty of time for the panic to rev up again.

‘I don’t think there’s any rational way to answer this question. My gut feeling is that this thing has run its course because most panics never really get going again once they peak. But Y2K could be different: it has a specific deadline. The major media will probably pick up the story again in November or December, and there’s a good chance the whole thing will start again then.

You can buy gold coins to protect against a known danger, such as Y2K… but they are probably even a better hedge against dangers that are not known. Even if the price of bullion doesn’t rise… you get a nice dividend: it settles your nerves and may even lower your blood pressure. For more information on Bill Bradford’s coin newsletter, Analysis & Outlook, write R.W. Bradford, P.O. Box 1167, Port Townsend, WA 98368.

Bill Bonner
August 12, 1999

The Daily Reckoning