Coins

T his study emerged from my acquaintance with Charles J. Lidman, President of New England Rare Coin, who offered to support an academic study of the rates of return on investments in rare coins, one of a group of exotic assets that until recently had caught the fancy of investors and portfolio managers. Indeed, the study uses data from the 1970s, a decade that was generally a profitable period for investors in coins, and that bred many investment enthusiasts. Had I completed and published this study sometime during 1980, few would have paid much attention to yet another analysis recommending that one hold coins in one's portfolio. As the wheels of research were slowly crunching the data, however, the year 1981 wrought disaster on coin investors, while 1982, as of this writing, has brought more of the same. Nevertheless, these events are not inconsistent with results from the 1970s, presented below. While we find that the standard Capital Asset Pricing Model (CAPM) cannot explain the success of coins during the 1970s, neither can it explain their failure in the last two years! We can, however, explain both the boom and the bust in coins by an expanded CAPM that accounts for the effects of inflation on asset returns. We show that coin returns behaved similarly to commodity futures contracts, providing a potent inflation hedge. Thus, the returns of both coins and futures during the 1970s and the 1980s can be explained by our experience with inflation in those periods.