Money begets money. But those who’ve invested in rare coins are minting big bucks.

Coins as an asset class delivered a nominal mean annual return of 10.5% between 1941 and 2003, according to the Journal of Financial Planning.

“The rarest coins offer strong price appreciation for mid- to long-term investors,” says Daniel Wade, editor of a news website for Paul Fraser Collectibles, a U.K.-based company specializing in the sale of high-end collectibles, including rare coins.

“Coins are not directly correlated to any other mainstream investments,” he says. “They offer investors diversity away from the stock market—hugely important [considering] the state of the world’s economic climate.”

Coins deliver their best relative performance during periods when long-term bonds do poorly, he adds.

But more importantly, “The price of gold and silver always plays a part in the value of a gold or silver coin, with many specimens trading way above their numismatic value,” says Wade. “Be sure to choose a coin that has collectible value in addition to metal value.”

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US coin with female head
representing Liberty, dated 1891

1967 Canadian dollar

Front view

1967 Canadian dollar

Back view

The soaring price of gold since 2000 has seen several common gold coins achieve considerable price appreciation in recent years, to such an extent that values in some cases match those of much rarer specimens. However, a bubble could be waiting to burst.

“What will happen should the gold price drop?” Wade asks. “Gold coins of numismatic value will still be valuable because they are highly collectible, yet the more common examples will fall away in price.”

Over the long term, though, a fall in gold prices can be offset by the historic value of truly rare coins. So invest when gold prices are stable, stock markets volatile, and interest rates persistently low.

Finding the right time to enter the market can be tricky. Many investors are holding on to their collections in the belief that an end to the global economic crisis will bring more potential buyers and create a seller’s market.

Bear in mind, though, harsh economic conditions mean people need quick cash. So “buy through a reputable dealer; one that offers you a lifetime guarantee of authenticity, and you avoid the worry of being stung by a fake,” Wade says. “The most valuable coins available through auction houses will already have been fully authenticated.”

Coins require little in the way of maintenance, so long as they’re professionally packaged when first bought. “Never try to clean them yourself,” he cautions. “This will leave marks visible under a magnifying glass that can significantly devalue your coin.”

Like all collectibles markets, supply and demand factors play a key role in investment returns.

“With a growing body of buyers around the world, demand is soaring while supply of historic pieces is slowly dwindling,” says Wade. “The market for coins of real numismatic value, therefore, is set fair.”

New frontiers

Until recently, the majority of coin collectors came from developed countries. Nearly 50 million coin collectors in the U.S. account for more than $10 billion in annual sales, but the landscape is fast changing. BRIC nations are a growing force.

“India’s coin market is currently worth approximately $2.1 billion, with investment-led demand now accounting for 30% of gold coin sales,” he says. “We expect India to become an increasingly big player in the gold coins market.”

That’s partly because its middle class is on course to grow to 547 million by 2025, according to the National Council for Applied Economic Research, an Indian think-tank.

Allocation guidance

A 2011 report from Capgemini and Merrill Lynch Global Wealth Management predicted the affluent would devote 8% of their portfolios to alternative investments in 2012.

“We believe rare coins can play a small but significant role in that 8%,” Wade says.

Several indexes and benchmarks that track the return on investment of rare coins prove collectors’ interests go well beyond esthetics.

The U.S.-based Professional Coin Grading Service (PCGS) offers the PCGS 3000 Index, a basket of coins that represents the overall market.

The average coin on the PCGS US Key Dates and Rarities Index rose by 8% annually between January 1970 and August 2012.

And at the American Numismatic Association’s yearly convention, Fair of Money, a unique 1873-CC Seated Liberty No Arrows dime sold for $1.8 million in August 2012. That’s an 11.96% annual increase on its $891,250 sale price in 2004.

Apart from auctions and private sales, collectors can also trade coins through platforms such as the Certified Coin Exchange, a rule-governed trading system for coin dealers in the U.S.

However, if you don’t care to own a hand-beaten piece of history, there’s a passive way to access the market: through coin funds. Connecticut-based Certified Assets Management International and U.K.-based Avarae both run hedge funds that invest in rare and high-quality coins.