Looking Back at 2010 to Look Forward for 2011

Jan 2, 2011 | coins, economy, gold, investment, policy, silver

Many things can be said about 2010, but for numismatics and precious metals it was quite a ride. What could this ride tell us about 2011?

Looking at the economy, the real gross domestic product—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 2.6 percent in the third quarter of 2010. A rate greater than in 2009. Although real disposable personal income increased 0.2 percent through November, the consumer price index rose at a faster rate of 1.1-percent while unemployment reached a one-year high of 9.8 percent in November.

If the slow improving economy and expanding unemployment has you confused, the simple explanation is that if the economy was a bus, it just pulled away from the curb and the driver started to shift into second gear while employment has yet to be allowed aboard. Although economists agree that employment and Consumer Confidence Index are lagging indicators, neither have seen improvement in 2010. Although the politicians are hoping their lame duck legislative efforts will help the unemployed to board the employment bus, it is possible that the bus will be too far down the road to make a difference in 2011. Let’s hope it is not too late!

In an attempt to provide its version of stimulus in 2010, the Federal Reserve’s lowered its discount rates and its ability to manipulate the money supply to try to provide relief. Although the Fed has increased the money supply, the United States dollar has not been significantly weakened against most of the world currencies—although some would say that it was seriously weakened in 2009. While the dollar has fluctuated against other major currencies throughout the year, the dollar has shown marginal only weakness against the British Pound, Euro, and Yen year-over-year while there were no weaknesses against the Reniminbi (or Yuan) because of institutionalized currency manipulation in China. Many economists believe that the avoidance of a dollar free-fall was because of the failure and pending failure of some Eurozone economies and China’s desire to reduce its own inflation concerns. The rumblings to remove the dollar as the standard and benchmark currency that we heard in 2009 subsided in 2010.

To measure the effect of the economy on the numismatic markets, I use the PCGS3000® Index as an indicator. The PCGS3000 Index is a market basket of 3,000 coins that PCGS their analysts believe represents the broad market. The variety of coins makes for a good indicator but as a broad market basket, movement indicates trends rather than a real-time indicator (similar to the Russell 2000).

The PCGS3000 Index opened 2010 with at 68,476.87. After dropping to a 12-month low of 66,886.27 (↓2.3-percent) in August, the index closed at 67,323.11, down ↓1.68-percent for the year. For a market basket that consists of 3,000 non-volatile items made from a variety of metals an in different grades, a downward trend of one-to-two percentage points indicates a weakness in the numismatic market. While some think the markets are strong—and there has been no slow down in the high-end coin market—collectors and some investors are either pushing prices downward or waiting for prices to drop before buying. Like in retail sales, many purchasers are standing on the sidelines waiting for the bargains or the market to settle.

But if the economic indicators do not show weaknesses except in employment, then why should the numismatic market show a weakness? The answer can be summed up in two words: gold and silver.

Some dealers and auction houses have found that the buyers for the high-end coins have continued their strong buying but the rest of the market has not joined them. One of the factors can be that the price of gold has scared many people away. When the markets opened on January 4, 2010, the price was $1,087.50 for one troy ounce of gold. During the year, the price never dipped below $1,050 climbing to $1,420 on December 7 before closing at $1,405.50 on December 30. As a result, investors who bought gold prior to 2010 saw their investment to rise 29.2 during the year. One would think it makes sense that the generic gold coin market would rise with the gold market. But a look at the PCGS Generic Gold Coin Index found that even with gold’s rise through the year, the generic gold coin market also saw a 17.76-percent drop in prices. However, Proof Gold rose only four-tenths of one-percent (0.41%) showing that there continued to be a little activity in the high-end market.

If there was a bull market in 2010 they were running for silver. After opening the year at $16.99 per troy ounce, silver closed at $30.63—a whopping 80.4-percent increase! Although less than the $54 ($143 adjusted for inflation in 2010 dollars) that it reached when the Hunt Brothers tried to corner the silver market in 1980, the 2010 rise is significant because few believe that the markets are being manipulated. In fact, one analyst believes that the silver market is undervalued as compared to the gold market. He said, “The gold rush of the 2000s is going to be nothing [compared] to the silver rush of the 2010s.”

When looking at the numismatics market, silver is the key metal. Up until 1964, every dime, quarter, half-dollar, and non-gold dollars were made of silver. Silver has been a key coining metal since the creation of the United States Mint in 1792. Many of the most collectible coin ever created by the U.S. Mint were struck in silver. Nothing represents silver coins like Morgan and Peace Dollars. Arguably one of the most popular numismatic collectibles, Morgan and Peace dollars are 26.73 grams made of 90-percent silver and 10-percent copper making its melt value $23.03 at the end of 2010.

But the value of Morgan and Peace dollars extend beyond their melt value. Morgan and Peace dollars are tied to the late 19th and early 20th century history of silver manipulation in the United States with designs popular with collectors. Morgan dollars struct at the Carson City mint are amongst the most desired. Since the GSA sales in the 1970s, the prices of these coins have gone up—in some cases beyond the reach of the average collector. Of the Peace dollar series, the high-relief 1921-D dollar is very desirable as is the low mintage 1928 dollar, and the 1935 last year of issue dollars. And the rumor that not all of the 1964-D Peace dollars were melted makes finding out the absolute truth a great interest to the numismatic world. However, with the rest of the market trending downward and silver skyrocketing, the PCGS3000 Morgan and Peace Dollar Index found the market rise-then-fall-then-rise again to end the year up eight-tenths of one-percent (0.825-percent) for 2010. Not a great showing, but demonstrating that Morgan and Peace dollars are still popular amongst collectors.

What is clear is that the coin market was down in 2010 while investors and even some collectors might have been concentrating on gold and silver bullion.

In speaking with some dealers, many have said that they have survived the last two years buying and selling bullion including American Eagle coins. One said that the numismatic market has been very slow that the bullion market has allowed him to stay in business during this era being dubbed “The Great Recession.”

Just because the calendar turns does not mean the market will turn along with it. Even though the lame duck congress passed significant stimulus legislation, it will take some time for those measures to settle into the markets. Some experts think that the eventual hiring may not occur for at least six monist and that there will not be a significant drop in unemployment until the fall. Others point to the infrastructure project the new laws are supposed to support forgetting that even shovel-ready projects have legal requirements, such as contract and environmental restrictions, that have to be address before a shovel can be used. In short, we may be in for more of the same through the first and even second quarters of 2011.

The new congress will help keep the economic uncertainty alive. Although the Republicans will control the House of Representatives, the Senate will be controlled by the Democrats with an active Republican minority who has shown that they will use the body’s rules to try to force their will. In other words, prepare for gridlock. None of this takes into consideration that Rep. Ron Paul (R-TX) will be the chairman of the House Finance Committee, thus allowing him to have control over economic policy in the House!

Neither the lame duck stimulus or the new congress will do anything to settle the markets in the short term. With the uncertainty, investors will continue hedge their bets using precious metals. Gold will continue to rise but at a rate less than in 2010. It is fair to say that with the current valuation being so high, it is likely that 2011 will end with gold only rising by 20-percent. However, the argument that the gold-to-silver ratio is out of balance being very compelling, we may see silver continue to climb. Silver may not climb at the 80-percent rate we saw in 2010, but a 40-percent rate may be reasonable. If this holds true, this time next year we could be talking about gold being $1,680 per troy ounce and silver closing at $42.

During the Fall of 2010, the PCGS3000 Index rose a bit from its low for the year and the low since the index’s all-time high in 2008. But with other factors not changing in the short term, could this be the coin market’s version of a “dead cat bounce?” A dead cat bounce is a small yet brief market recovery derived from the idea that “even a dead cat will bounce if it falls from a great height.” It is more likely that the numismatic market will flatten a bit while the rest of the markets figure out which direction they will go.

The first indication of how the numismatic market starts the year will be at the F.U.N. Show held January 4-9 in Tampa, Florida. With F.U.N. being one of the largest non-ANA shows of the year, sales and dealer impressions will set the tone for at least the next few months. Under the premise that markets do not turnaround quickly and that the last major show, Whitman Baltimore Expo in November, saw only nominal sales, one can assume a similar atmosphere for F.U.N. It will be more reasonable to wait until the National Money Show March 17-19 in Sacramento and the Whitman Baltimore Expo held March 31-April 3 to determine if the numismatic market will be better in 2011. At the end of the year, it is reasonable to expect that the PCGS3000 Index will be up 2.5-percent by the end of 2011 given the other market forces.

Of course predicting any market is a total crap shoot. While my roll of the dice may be no better than others, I would caution against thinking that my crystal ball is clearer than anyone else’s. All I have done is read the proverbial tea leaves and drank the tea while throwing darts at the wall trying to guess what the future will bring. Or as one comedian used to say, “That’s my opinion, I could be wrong.”

Metals charts courtesy of Kitco.
The PCGS300® Index courtesy of the Professional Coin Grading Service.