Why rare coins? Not all gold investments are created equal. Coins have more going for them than beauty.

Not all gold investments are created equal. Coins have more going for them than beauty.

WHY indeed should anyone buy rare U.S. coins? Let's assume that you are bullish on gold as an investment. Let's assume that you feel, as I do, that demand from the booming economies of Asia will help drive the prices of precious metals substantially higher over the next few years.

Why, still, should you invest in rare coins, which offer only modest bullion value in comparison to their market value?

I have asked myself that question many times in my business career. Over the past three decades, I've been involved in a number of different businesses related to precious-metals investing. In fact, I've become recognized as somewhat of an expert on the subject. Subscribers to my Gold Newsletter, for instance, have enjoyed some tremendous gains by speculating in our recommended mining shares. So it's fair to ask why anyone should also invest in rare U.S. coins, given the fact that mining shares will already provide leverage to gains in gold itself.

The answer is that all three asset classes -- bullion, mining shares, and rare coins -- are valuable tools for the precious-metals investor, and each offers its own advantages: Timing: The time to own bullion is always now. In other words, prudent investors should always maintain a core holding of gold and silver bullion, easily accessible and in portable form, as an insurance policy against economic turmoil. As with most insurance policies, you hope that you will never have to cash it in. The best time to own mining shares is not always now. That's because mining shares tend to lead the bullion markets, rising and falling in anticipation of gains or losses in gold and silver. For example, when gold started to take off at the start of the year, the mining shares had already begun to move higher weeks earlier. In contrast, rare U.S. coins have tended to lag the gold market both on upswings and on downswings. This gives the investor more time to recognize a trend in either direction, and therefore to buy or sell at more appropriate times.

Leverage: Gold is the ultimate currency -- the only currency that has held its purchasing power throughout human history. And in a bull market, gold's purchasing power and price can rise considerably in terms of the world's fiat currencies. That equates to profits for gold-bullion investors. But sophisticated investors know that they can multiply the gains in gold through investment in mining shares.

And rare U.S. coins offer the same degree of leverage as mining shares, while also offering intrinsic and portable value.

In fact, while, as we saw above, mining shares tend to lead gold in a bull market, the record shows that rare coins have typically caught up later and passed them both. For example, in the historic gold bull market of 1976 to 1980, an eight-piece rare U.S. gold set in MS-65 grade far outdistanced the gains in gold bullion and in all but the most speculative of gold mining shares.

Rare U.S. coins have yet another critical advantage, one not shared by either gold bullion or mining shares. Rare coins have proved to have a unique ability to rise in price even when gold is moving sideways or falling. Because of their rarity and status as a collectible, gold coins can keep rising whenever there is an increase in demand, no matter what the reason.

A perfect example of this occurred in the late 1980s. During the 18 months between April 1986 and September 1987, gold bullion rose 35.3 per cent. Meanwhile, gold shares (as measured by the XAU index) soared by 126.3 per cent. In comparison, eight-piece rare gold coin sets rose a mere 18.8 per cent.

The gold bull market was brought up short by the Black Monday stock crash. The fall in share prices was so deep and widespread that it created a massive liquidity crunch. Many investors were forced to look for cash in every area of their portfolios, and as a result gold and gold shares dropped 18.9 per cent and 39.7 per cent respectively to June 1989.

But during this same period, rare gold coins rose by 120.3 percent.

This was not a one-time event, either. From July 1984 to June 1986, for example, gold dropped by 1.2 per cent and gold shares by 23.7 per cent. At the same time, rare gold coins rose by 18.9 per cent. And from November 1990 to April 1992, gold dropped by 12.6 per cent and mining shares by 18.0 per cent, yet rare gold coins rose by 19.4 per cent.

This unique ability to leverage the gains in gold, and often to rise in value even when gold drops, is why I recommend rare U.S. coins as a critical component to a complete precious-metals portfolio.

That's not to say that rare coins will never drop in price; all investments run in cycles, and all investments entail some degree of risk. But rare U.S. coins happen to be near the bottom of an exceptionally wide price swing right now, making today's opportunity even more dramatic and potentially profitable.