Will the Collectible Paper Money Market Improve Despite Tough Economic Times?

The following is an op-ed piece, and should not be construed as investment advice. Evidence is anecdotal and based merely on personal observations. Please research carefully before purchasing a rare piece of collectible currency as an investment.

The USA National economy is in recovery, albeit at an anemic pace. Likewise, the paper money market took a hit after a soaring year in 2008, but has recovered satisfactorily in recent years. As with any investment, when people are short on cash, they’re going to be paying the bills first, and buying currency second with whatever is leftover. With the stock market reaching its highest points in a few years, will paper money likewise rebound?

In a word: Yes.

So far in 2013, the market has seen record highs for rare notes sold at Heritage Auction Galleries and Stacks and Bowers Auctions. In fact, during the April 2013 Heritage Auction, two notes sold for excess of $1.75 million each. Obviously two $1,000 Treasury Notes don’t make regular appearances, so the big money came out for a once in a lifetime opportunity. Still, other “trophy notes” saw spirited bidding. More common notes saw mixed results, but no huge disappointments. Avid collectors good at spotting value went after great deals, and were prepared to battle it out – if necessary – for notes crucial to their sets.

Of course, the top end of the paper money market is dominated by high end collectors with big bank rolls. Those who were well-off prior to 2008 most likely remained so even after the Great Recession, unless they were overexposed to real estate and sub-prime securities. Otherwise, 2008 was a bump in the road and an important correction for investors at all levels and a much needed wake up call.

The average paper money collector probably stayed away from larger purchases during the uncertain months after TARP and the various government stimulus programs were enacted. This was especially true for collectors with children heading off to college: despite tough economic times, raising kids and paying for school DID NOT get cheaper, and neither did healthcare and tax rates in some areas. With “main street collectors” taking a timeout, prices for mid range notes went down a bit, waiting for people to open their wallets again.

Additionally, many people are looking to alternative investments besides the usual stocks, bonds, and real estate purchases most Americans make. Some people got wiped out following traditional investing advice. Now wiser, they’re looking for ways to diversify their portfolios, and collectible currency is one way of doing it.

On average, one must wait 5 years before realizing a gain on a currency purchase. If the note is worth more than $5,000, it’s likely you’ll have to sell at a major auction or to well financed dealer. Taxes must be paid on any capital gain, and the rate can be higher for collectibles compared to ordinary investments unless you can claim your paper money is inventory or stock. Otherwise, it’s best to hold on to notes for at least 3 years to avoid getting whacked by the IRS.

Of course, you could also buy 10 notes valued around $500 a piece, and sell them piecemeal to avoid showing up on the tax radar. Technically speaking, you could also sell notes at a loss to decrease your tax liability, although this should be done sparingly since your “investment loss” is non-traditional.

Bide your time and strike when the iron is hot. There are plenty of great notes coming up for sale with fantastic investment potential. If you’ve got the money and are secure in other areas of life, a wise currency investment is potentially less risky and more profitable compared to stocks and bonds. Some of the hobby’s top collectors and dealers have invested nearly ALL of their savings in collectible paper money, and most weathered 2008 without too much distress.

Sometimes the talking heads on TV forget there are other ways to save money and make money. Collectible currency is an excellent investment and in most cases you WILL make money when it comes time to sell!