Fast little loans
This article was first published in the first-quarter 2012 edition of Personal Finance magazine.
You must have come across commemorative coins in your loose change – the ordinary circulation coins that recall 10 years of democracy, the presidential inauguration in 1994, the cricket World Cup in South Africa and other milestones in our history. Some people may have saved a few of these coins in the hope that they will be worth a bit in the future.
The R5 coins with the face of former president Nelson Mandela have a special nostalgic appeal, and the most recently issued one was to celebrate his 90th birthday in 2008.
But would you believe it if you were told that one of these 90th birthday coins sold for R2.5 million? Others sell for anything between R50 000 and a couple of thousand rands.
These, remember, are simply R5 coins. There is nothing special or rare about them – more than 22 million were issued by the South African Mint.
But a lucrative trade has developed in which clever sellers convince gullible buyers that certain R5 Mandela coins are extremely rare and are therefore worth a lot of money. Any coins could be sold in this way, but by far the most popular is the Mandela 90th birthday R5, issued in 2008, so this article will concentrate only on these coins.
The scheme is very simple to see through if you have a basic grasp of coin grading. It works like this.
First, the seller needs a supply of coins that have never been in circulation, plus a company to grade them and a population report. A population report, or census report, shows how many coins of a particular type have been given a particular grading.
The coins sold for hugely inflated prices have never been circulated, unlike the coins that arrive with your change from the supermarket teller or newspaper vendor. Instead, these coins were bought in their hundreds of thousands direct from banks and the South African Mint. They are then sent to the United States for grading, which, in the simplest possible terms, means an assessment of their features, such as the lustre, appearance and number of imperfections of each coin.
When the coins return to South Africa, each is encapsulated in a Perspex slab that shows which company graded it and what grading it was given. This process is also called "slabbing".
The sellers are able to market any coins that come back with a grading between MS70 (perfect) and MS60 (a coin that only just qualifies as uncirculated and has visible scratches). MS refers to "mint state" (see "How the grading system works" on the previous page for a basic explanation of grading).
Now the R5 brigade can start working their sales channels, phoning clients or putting the coins on an auction website such as Bid or Buy.
The marketing can take two angles: the high quality of the coin or, if the coin is not of a particularly high quality, then the rarity of the coin in its particular grade. Both angles rely on the buyer's ignorance of what is meant by rarity.
The following extract is from Bid or Buy and is the sales pitch for a coin that was graded MS60: "The elusive MS60. Very scarce in this grade. The one you can never get your hands on."
The coin sold for R5 501 on October 9, 2011.
And, in one sense, the seller was not lying when he or she said the coin was "very scarce in that grade". The population report almost certainly said there were not many Mandela R5 coins that had been given that grade. But that is not an indication of rarity out of the whole universe of R5 Mandela coins - just that not many have been sent for grading and emerged with that grade - they are what numismatists call conditional rarities.
"Far from indicating great rarity, a low population actually might reflect extreme commonness: a high-mintage modern coin, for instance, might have a low population in one of these reports simply because hardly anyone has bothered to submit any pieces for certification. Having little or no premium value, they aren't worth the bother and expense of being certified," Scott Travers Rare Coin Galleries writes in "10 myths about the modern coin market" (www.pocketchangelottery.com/article62.htm).
It is not worth the bother and expense ... except for a seller who can find gullible buyers.
As a participant in the Bid or Buy coin collectors' forum noted in May 2010: "Why on earth are bidders paying upwards of R16 000 for 2008 Mandela birthday R5 graded MS61?! That's like paying R400 000 for a 2005 Ford Fiesta ... simply because the car dealer has fewer 2005 models in his showroom."
Even the "very scarce" selling point will not last long as the popularity of this trade catches on.
In mid-October 2011, US grading house Numismatic Guaranty Corporation (NGC) said in the "Research" section of its website that it had graded more than 115 000 examples of mint-state Mandela 2008 coins.
And the National Association of Numismatic Societies has been informed that every month about 24 000 Mandela R5 birthday coins are sent for grading in the US, Peter Wilson, the chairman of the association, says.
"The biggest problem in numismatics at the moment is the Mandela R5 coin. That's where the bulk of the rip-off is occurring. These guys (the sellers) are doing immeasurable damage to the noble hobby of numismatics."
Wilson says prices have got to "ludicrous" levels.
What can be more ludicrous than one of these coins selling for R2.5 million?
The website of a Gauteng company, SA Coin, says that's the price achieved for an uncirculated MS69-graded Mandela R5.
Gerrit Marx, the operations manager of SA Coin, confirms the company made the sale in June 2010 to a buyer who wants to remain anonymous. "When the MS69 was sold, there was only one of them in the world. The price was market-driven," Marx says. "Because there was only one, the seller wanted that price. We got him a buyer.
"This particular individual [the buyer] does not want to be public on this particular issue – we need to respect his privacy. But that buyer is up to today one of our biggest investors."
At about the same time as the R2.5-million sale – also in June of that year – a Mandela 90th birthday R5 coin with the same grade from NGC was sold on auction site Bid or Buy for R51 600. Marx says of the Bid or Buy price: "It is not reflective of market value."
He says none of the coin dealers will put a coin up for sale at a price below the market value. And market value, he says, "is the overall accepted sense of the value of a coin among dealers who have experience in the field".
At the time this article was concluded in late November, nine coins had been graded MS69 by NGC, Marx says, although he conceded he had not checked the population report for two or three weeks.
He is not perturbed by the increase in the MS69 population over the 18 months since that multi-million-rand sale, or for the implications this has for the price of the coins.
The SA Mint will not release any more of the 2008 coins and it is also the nature of the coin that makes it special, he says. "Never in history has a coin been struck for a living former president for his birthday. That is what made the 2008s so much in demand – I call them blessed.
"When Mandela fell sick at the beginning of the year, our phones rang off the hook. Everyone wanted something of him. That week I ran up and down like a headless chicken to meet the demand."
Marx sees the coins as an investment.
"Our strategy is for people to make money by investing in these coins. We are an investment company. We give [our clients] a mandate: keep your coins for a minimum of five years and then we will find buyers for the coins. We can't give a guarantee that we will secure the same price the buyer paid, but our client base is 30 000 people."
That is another distinction Marx points out between the R2.5-million sale and the Bid or Buy price of just over R50 000: online sales are to the general public, whereas when a client of SA Coin wants to sell a coin, the coin is listed and the customer base made aware, which helps keep prices intact.
Marx says SA Coin has done R100 million in turnover over the past five years, primarily in sales of R5 Mandela coins.
"SA Coins started out mainly dealing in ZAR coins (coins from the Boer republic and Kruger era), then incorporated the Mandela coins," he says.
"We are leaders in especially the R5 market."
In June 2010, the following prices on NGC-graded R5 Mandela coins were realised on Bid or Buy:
* R2 900 for an MS60;
* R20 075 for an MS61;
* R3 500 for an MS62; and
* R51 600 for the MS69 mentioned above.
Prices have come down to earth from those heady days. In October 2011, the average price realised for an MS61 was about R900, while MS62-graded coins sold for between R100 and R145.
If the Bid or Buy market has come off the boil somewhat, the market is still hot elsewhere, according to Glenn Schoeman, the president of the South African Association of Numismatic Dealers and the chief executive of Gold Reef City Mint.
"A client phoned me and said he had struck a bargain. He had been offered 50 NGC-graded MS66 Nelson Mandelas. The seller only wanted R25 000 a piece. The guy told me they are worth R40 000 each," Schoeman says.
"I asked him: 'How rare can they be? The guy is offering you 50 of them'."
Schoeman sees the person who buys the coin at these huge prices as a victim: "The person is not a numismatist or a collector but a victim."
Schoeman says there are people who are on the telephone all day trying to sell the coins – "and they do sell them".
Another way the average person could end up being enticed to buy is through discount coupon websites such as Groupon. (These websites disseminate news of discounts offered by businesses to consumers. But the savings kick in only if a certain number of people take up the offer. The intention is that buyers encourage family and friends to take up the offers as well.)
Earlier this year, another dealer, Coin Invest, offered MS66-graded Mandela 2008 R5 coins for sale through Groupon with the following sales pitch: this is an "extremely valuable coin that will only become more valuable over time". The coins were on sale for R1 232, which was described as a "discount of 56 percent" and a "saving of R1 568". Coin Invest sells them on its website for R2 800 each.
A total of 439 people bought the coins.
If they had spent 30 minutes looking on the internet, they would have seen that MS66-graded Mandela R5 coins sell on Bid or Buy for about R90.
In October 2011, the Coin Invest site was offering an MS67 for R4 669. Coins with the same grade were selling for R300 on Bid or Buy at the time.
Personal Finance could not track down any person associated with Coin Invest or any physical address.
The website gives only a fax number and an email address as the company's contact details. Groupon's offer said Coin Invest was a Cape Town-based company. Telkom's directory inquiries gives a number for a company by that name in Johannesburg, but when that number is phoned, the person on the other end answers "Royal Coin" and denies knowing the name "Coin Invest".
There is no trace of the name "Coin Invest" on the database of the Companies and Intellectual Property Commission.
An email received on November 7 from QuePon Discount offered MS67s for R1 400 "instead of R4 500". The QuePon website gave no clues as to who was behind the offer and did not reply to this writer's email asking for details. Two weeks later, the same URL – www.quepondeals.com – could not be found.
Only some dealers sell Mandela R5 coins at highly inflated prices. Others do not deal in them at all or stock only a few for the tourist trade.
One of these is Cape Town Coins and Collectibles, a franchise of seven outlets in the Western Cape. The branch in central Cape Town had an MS66-graded coin on sale for R350 when Personal Finance visited.
There is demand for the coins in Cape Town, mainly from tourists who want to take home a Mandela-related memento, Brink Laubscher, a partner at Cape Town Coins and Collectibles, says.
"We keep very low stock of the Mandela birthday coins. We feel it is not a good investment but, as there is demand for it from tourists, we do make a couple available to them.
"We will not advise anybody to buy the Mandela birthday coin for investment purposes."
You can find out more about Cape Town Coins and Collectibles at www.coinsbymail.co.za
One person who has seen the damage done when uninformed people blindly invest their money is Morné from Pretoria. He contributed to discussions about the Mandela R5 phenomenon on the Bid or Buy numismatics forum under the name Rare NotesCoins. In the discussions, he wrote: "I get guys aged between 20 to 69 coming to the shop who have bought these coins at horrific prices.
"They will never buy coins again because people rip them off so badly."
Elsewhere on the forum, he wrote: "Try explaining to a 60-year-old guy that the R200 000 he spent on these coins is worth only R8 000.
"I can still see the hurt and the disappointment in his eyes. Disappointment in [the] people that are supposed to help you invest money you work so hard for over a lifetime."
Money is lost because buyers misunderstand what rarity really means.
"With a mintage of 22 106 000, these [coins] are extremely rare," Morné wrote.
"So rare that I have been offered 150 bags sealed with 400 coins per bag for R15 500 per bag. Very rare indeed. Not like the common chicken tooth or the Springbok grand slam."
HOW THE GRADING SYSTEM WORKS
In the Sheldon scale system used in the United States to grade coins, the prefix MS means "mint state" and refers to a coin that is regarded as uncirculated. The number of imperfections that an MS coin has is shown by its score on a scale from 70 to 60. For example, an MS70 is a perfect uncirculated coin (obviously, this is rare), an MS65 has minor imperfections and an MS60 has fairly abundant scratches that can be seen by the naked eye.
Numismatic Guaranty Corporation (NGC) is the most popular company in the US used for grading the Mandela R5 90th birthday coins.
The rarity (or otherwise) of a coin in a particular grade can be determined by checking the population reports for a particular coin.
These population reports are available from the grading companies. For example, a member of he NGC Collectors' Society can log on to the NGC website and find out how many R5 Mandela 90th birthday coins have been awarded a particular grade by the NGC.