In the world of coin dealing, how can a US coin dealer amass extremely large losses?

Prethen · January 2, 2011 1:12AM

Please, NO names!

I'm creating this thread as a hypothetical against a situation that may apparently have been real. Please refrain from using any real dealer or collector names.

So, the question is basically, how does a dealer make tens or hundreds of thousands of dollars in the coin trade disappear?

An obvious way might be to buy huge amounts of fake gold coins. But, that would still take a bit of an effort (unless they're all high-priced rarities), especially if the coins still actually contain gold.

Even if a dealer made a bunch of bad buying decisions, chances are you still have quite a bit of value in the coins you've acquired.

I'm curious for a detailed illustration or two of how this might occur.

RYK · January 2, 2011 1:19AM

Two things come to mind:

1. Being on the wrong side of precious metal moves, with leverage.

2. Using business income and capital for personal expenses.

Of course, habitually buying the wrong coins at the wrong price can have a negative, compounding effect over time.

sinin1 · January 2, 2011 1:30AM

making a large purchase from a large gold dealer in FL that has a large house
and finding out before gold receipt that the purchase was a going out of business sale

having a few sales that turned bad cuz buyers used check written on non-existatnt bank account

having some large sales disappear in the christmas mail rush and being underinsured on mailings

buying at close to retail and selling on eBay, turning sales into negative cash flow

large overhead from traveling to many national shows

inventory that is losing valur due to declining market in that series

selling items that you do not have on hand yet in rapidly volatile market

making deals buy/sell with other large dealers who later back out or reneg after you have completed your half

it could be a domino effect with some large players affecting many more players as a result of their actions

for instance - what if a large auction house files bankrupcy after sale and before settlement and you had a big consignment in that sale?

darktone · January 2, 2011 1:30AM

I have had friends in the used car business sell someones car on consignment and use that money to pay other bills and keep putting the car owner off on payment by making various excuses. Sooner or later this snowballs on them and they do this to everyone and lose their business,get black balled in the used car market and maybe even go to jail for tax evasion. I guess any business selling a product can fall into this problem.

Coinzine · January 2, 2011 1:40AM

<< large overhead from traveling to many national shows >>

1 night in the Hyatt = $300+ in most cities...or 4 day trip at $1200. Flight = $200 - $1000+ etc. Just the travel can add up quick

Justacommeman · January 2, 2011 1:43AM

Using proceeds for personal expenses or personal emergencies

being on the wrong side of a precious metals move

selling items that you do not have and then having to over pay to get them

underestimating operating/travel expenses

overpaying for material

deals gone bust/ theft

any cominbation of these can compound rather quickly. End result, your on hand inventory diminishes and you can no longer sustain a proper cash flow.

MJ

RWB · January 2, 2011 1:43AM

Buying high and selling low - works every time

keets · January 2, 2011 1:46AM

well, i know that back in 1980 during the Hunt Brothers attempt to corner the Silver market that spot was around $50/oz. when everyone went to bed and they awoke to find it under $20. do the math on $1000 face bag; it went from around $30k to under $15k.

notwilight · January 2, 2011 1:50AM

Dealing moderns has worked well for me. The losses are small, the gains are generally small but there is an occasional windfall. If volume is high enough, I can do pretty well. But I don't worry about amassing large losses, that would be hard to do, even with poor business sense. --jerry

291fifth · January 2, 2011 2:00AM

Attempting, unsuccessfully, to stage a "well managed promotion."

Steve27 · January 2, 2011 2:06AM

Overpaying for high-end coins, which can be classics or moderns (PCGS PR70s of all denominations when they first appear on the market or buying the "only" 1933 Saint Gaudens Double Eagle for $7M).

crypto79 · January 2, 2011 2:30AM

dealing in what ever it is I am collecting often ensures the the series will take a loss in the price column

au58 · January 2, 2011 2:35AM

Greed. It's really that simple.

AUandAG · January 2, 2011 2:42AM

I live in Vegas, so I'll throw out gambling. Online gambling is not good: there
is nobody to tell you to leave, slow down, get some rest, etc. Too many casinos
in too many towns now and too easy to get involved. I'll bet 90% of formites live
within 50 miles of a casino today.
Back in the day you went to Reno or Vegas or Atlantic City. Had a budget, limited
time and usually a wife or spouse with you to keep you in check. No longer the case
and it's a real shame.
Gambling is an addiction the same as smoking or drugs or drinking to excess. Some
of you have decided to quit a habit as a new year's resolution. Good luck! I hope
you can do just that!

bob

COALPORTER · January 2, 2011 3:11AM

Did they over value thier current inventory and use that as an inflated basis to predict how much they could spend, or did they borrow or recieve inflated money or goods with the promise to repay at a latter date only to find they were way short when other deals feel short?

It might be cash flow management and not being able to time leveraged deals correctly and then the domino theory kicks in an snow balls.

or barrow money from loan sharks at like 3000% interest ?

the proof70/ms70 game ends with someone going down.

DuCrozat · January 2, 2011 3:19AM

Expanding too fast, too soon.
Striking while the iron is hot can scorch that shirt before losing it.

crypto79 · January 2, 2011 3:20AM

5 words-Lincoln formative years Doubled Dies

scottgardener · January 2, 2011 3:23AM

Get robbed or burglarized... and have problems with the insurance. ("We don't cover coins with dates divisible by seven unless they're properly stored on site at Fort Knox.")

Frankcoins · January 2, 2011 3:27AM

A number of dealers were holding large quantities of PCGS and NGC common date MS65 Morgan dollars when the price dropped from $600 to $60 around twenty years ago.

RYK · January 2, 2011 3:31AM

<< Add in the possibility of the Madoff touch and you will go down in flames no matter what. Investors investing their savings expecting a return and Madoff living on those itt gotten funds and returning the investment monies by only giving to the first investors first some return %. In the end it all catches up with you like out of control snowball to say the least. >>

I am not sure that this has much, if anything, to do with coin dealering.

RichieURich · January 2, 2011 3:36AM

Many of the earlier respondents provided good answers.

As a dealer, I would add the general statement: Being a coin dealer is more difficult than it looks to most collectors. Particularly when the dealer is just starting his/her business and has not yet found enough customers. You have to figure out what things you do make money, and do more of them, and do less of the things that lose money.

And the specific I would add: Getting involved in areas you know little or nothing about. If you know U. S. coins and not world coins, you have a lot of exposure if you get involved with world coins. You have no expertise there, so how could you make money there?

I admit, all of what I said sounds rather obvious when you think about it. But consultants have made millions of dollars giving advice like this.

ChrisRx · January 2, 2011 3:52AM

Spending/investing more than you can afford to lose.

BigE · January 2, 2011 4:00AM

<<<So, the question is basically, how does a dealer make tens or hundreds of thousands of dollars in the coin trade disappear?>>>

I dont think it is possible, unless the losses are personal. To be a coin "dealer" implies at least a basic understanding of a coins worth, smaller losses might be expected, but not losses on a grand scale-------BigE

RichieURich · January 2, 2011 4:08AM

<< <<<So, the question is basically, how does a dealer make tens or hundreds of thousands of dollars in the coin trade disappear?>>>

I dont think it is possible, unless the losses are personal. To be a coin "dealer" implies at least a basic understanding of a coins worth, smaller losses might be expected, but not losses on a grand scale-------BigE >>

Not necessarily. Everyone, including coin dealers, makes mistakes. Enough large mistakes, or even one huge mistake, can result in big money losses.

tradedollarnut · January 2, 2011 4:13AM

Poor cashflow management and poor decision making are the worst culprits [along with the big daddy of them all - changing market values]. Many times, deals are purchased and values assigned. Profits are made on the most desirable coins and then spent thinking the balance of the deal will generate even more profits. What usually happens is the balance of the deal languishes in inventory taking up funds and generating interest costs. Then, when funds are NEEDED for other expenses, the balance is blown out at a loss that negates all the profits earned on the desirable portion. This can force further sales at losses and create a snowball effect similar to a margin call.

ColonelJessup · January 2, 2011 4:33AM

<< ...for instance - what if a large auction house files bankrupcy after sale and before settlement and you had a big consignment in that sale? >>

Been consigning to every major auction house for the last 30 years and cannot remember this happening.

OOOPS !!! Sorry, it did happen. I have been reminded by a reliable source.

ColonelJessup · January 2, 2011 4:37AM

<< Please, NO names! >>

LOL, "He Who Shall Not Be Named" is famous for this. He was once described as "a genius trapped inside an idiot".

ANACONDA · January 2, 2011 4:44AM

Assuming that the coin dealer is not trying to amass these extremely large losses, it can be done in many ways, but these are the most likely:

1. He gets a backer, persuades him that he's a genius at the crackout game, buys a bunch of coins that he cracks out and then the majority don't get back into any holders

2. He gets a backer, persuades him that he's a genius at artificially toning coins, buys a bunch of coins that he artificially tones, screwing them up, and ending up with a bunch of coins that will never get back into any holder until ACG comes back into busines

3. He gets a backer, persuades him that he's a genius at buying and selling coins and at marketing, but he doesn't know what he's doing, buys a bunch of coins and constantly becomes persuaded that taking losses on coins he's only held for a little while can be made up by buying other coins that unfortunately get's him back into the same situation (he doesn't realize that he has to be patient to buy the right coins at the right prices and he has to be patient to find the right buyers for his coins that will put him into a profit position)

4. He gets a backer, persuades him that he is a genius at the auction - that buying coins at auction is always a sure thing, ends up spending way too much for coins that everyone had a chance to buy for around what he paid for them and they know what he paid for the coins, and then gets stuck with no cash to pay bills when the market either stagnates or drops and then has to sell them at auction getting less than what he paid for them and having to pay transaction costs (seller's premiums).

Notice the theme of him always losing the backers money? That's because he's too stupid to have made money in the first place but has survived at one thing he does well which is deluding himself and lying and scheming to part his backer from his money.

ColonelJessup · January 2, 2011 4:47AM

<< Poor cashflow management and poor decision making are the worst culprits [along with the big daddy of them all - changing market values]. Many times, deals are purchased and values assigned. Profits are made on the most desirable coins and then spent thinking the balance of the deal will generate even more profits. What usually happens is the balance of the deal languishes in inventory taking up funds and generating interest costs. Then, when funds are NEEDED for other expenses, the balance is blown out at a loss that negates all the profits earned on the desirable portion. This can force further sales at losses and create a snowball effect similar to a margin call. >>

I once questioned "He Who Shall Not Be Named" about the purchase of a 1913P Type 1 5c in PCGS MS68 from auction for just under $20K (it shure was purty). His response "I had it on a wantlist from WXYZ (national dealer who traveled very little) 6 months ago". When I saw it in his display case a bit later I asked what had happened. "He filled before I bought it." He sold it at auction a year later and took a 35%+ hickey.

And leveraging your "spillage" is a sure slow death. As many have previously noted, first you skim the cream, then you dump the rest. Get rid of your mistakes fast.

thezookrew · January 2, 2011 5:14AM

My wife owns her own business. It is small and didn't take a lot of capital to get started. That is a major exception to the rule. Between having a bricks and mortar site, advertising, having sales to get name recognition, buying inventory, buying store fixtures, utilities, insurance, fees, and myriad other monetary outlays, you are talking many tens of thousands of dollars JUST TO GET STARTED. If a new business owner had to borrow against inventory to start or have some other financial backer, he or she is going to be under a lot of pressure to perform, which puts much more stress on making the most out of every deal. This can lead to major missteps and losses. Remember, most new businesses, regardless of the field, don't survive the first 3-5 years.

Perry

Konahead · January 2, 2011 5:15AM

<< I live in Vegas, so I'll throw out gambling. Online gambling is not good: there
is nobody to tell you to leave, slow down, get some rest, etc. Too many casinos
in too many towns now and too easy to get involved. I'll bet 90% of formites live
within 50 miles of a casino today.
Back in the day you went to Reno or Vegas or Atlantic City. Had a budget, limited
time and usually a wife or spouse with you to keep you in check. No longer the case
and it's a real shame.
Gambling is an addiction the same as smoking or drugs or drinking to excess. Some
of you have decided to quit a habit as a new year's resolution. Good luck! I hope
you can do just that!

bob >>

??????? off topic

dcarr · January 2, 2011 5:21AM

<< 1. Being on the wrong side of precious metal moves, with leverage. >>

I think that some of the largest Denver-area dealers in the 1980s went down, in part, because of this.
One dealer's problems were also compounded by very high overhead (large store in a fancy mall).
Alcohol, drugs, and gambling didn't help either.

For one of them, the final act was a staged "robbery" as the basis for a false insurance claim.
As that plot was being discovered by authorities, the dealer fled to Costa Rica (still there, I think).

One was busted by the DEA for cocaine trafficking. He actually offered cocaine as payment for coins,
so I'm told.

And yet another was busted for knowingly receiving stolen property.

Longacre · January 2, 2011 5:24AM

Making bad business choices consistently, and not recognizing when things are going very badly. On a related topic, take Longacre's inlaws. How did they get $1 million in debt? Was it overnight? No, it was a consistent serious of "curious" choices, and bad habits, and always thinking that things would magically get better when they were doing nothing to change the underlying issue.

crypto79 · January 2, 2011 5:42AM

<< Making bad business choices consistently, and not recognizing when things are going very badly. On a related topic, take Longacre's inlaws. How did they get $1 million in debt? Was it overnight? No, it was a consistent serious of "curious" choices, and bad habits, and always thinking that things would magically get better when they were doing nothing to change the underlying issue. >>

I fail to see why you don't just cut a check and make your inlaws problems go away

ANACONDA · January 2, 2011 5:46AM

<< I think that some of the largest Denver-area dealers in the 1980s went down......Alcohol, drugs, and gambling ......the final act was a staged "robbery" as the basis for a false insurance claim. As that plot was being discovered by authorities, the dealer fled to Costa Rica (still there, I think).... >>

That wasn't me. I went to Costa Rica first THEN moved to Colorado. Just wanted to clear that up.

mrearlygold · January 2, 2011 5:47AM

<< 

<< Please, NO names! >>

LOL, "He Who Shall Not Be Named" is famous for this. He was once described as "a genius trapped inside an idiot". >>

CaptHenway · January 2, 2011 5:53AM

Drugs and gambling have done in more dealers than the Hunt Brothers ever did.
TD

AUandAG · January 2, 2011 6:02AM

<< 

<< I live in Vegas, so I'll throw out gambling. Online gambling is not good: there
is nobody to tell you to leave, slow down, get some rest, etc. Too many casinos
in too many towns now and too easy to get involved. I'll bet 90% of formites live
within 50 miles of a casino today.
Back in the day you went to Reno or Vegas or Atlantic City. Had a budget, limited
time and usually a wife or spouse with you to keep you in check. No longer the case
and it's a real shame.
Gambling is an addiction the same as smoking or drugs or drinking to excess. Some
of you have decided to quit a habit as a new year's resolution. Good luck! I hope
you can do just that!

bob >>

??????? off topic >>

If you think this is off topic, you best wake up. Gambling, booze and drugs have
ruined plenty of dealers. Once you get down it's easy to try for the "easy money" to
be made in gambling. Usually does not work out well. Our casinos here in Vegas are
constantly suing for markers and incurred debts. It's in our papers every week. These
are professional people losing their shirts, businesses, homes, families, etc. Coin
dealers are not immune.
bob

truthteller · January 2, 2011 6:12AM

I have known several coin dealers who were doing well in the coin market. They made good money and spent the profits on a comfortable lifestyle. When most of them passed away, the house of cards fell apart and the estates showed that they were tens to hundreds of thousands in debt. Many of the wives were unaware. Is this anything new?

TRUTH

BigE · January 2, 2011 6:33AM

<< 

<< <<<So, the question is basically, how does a dealer make tens or hundreds of thousands of dollars in the coin trade disappear?>>>

I dont think it is possible, unless the losses are personal. To be a coin "dealer" implies at least a basic understanding of a coins worth, smaller losses might be expected, but not losses on a grand scale-------BigE >>

Not necessarily. Everyone, including coin dealers, makes mistakes. Enough large mistakes, or even one huge mistake, can result in big money losses. >>

Of course "everyone makes mistakes". I have been in a business similar to trading expensive coins for over 25 years now and 90% of the time huge losses that bankrupt a business have a personal story attached to them-------BigE

coindeuce · January 2, 2011 6:41AM

I have been personally acquainted with a coin dealer who was a millionaire several times over, yet his gambling addiction has put him through both business and personal bankruptcies. I was one of a very select few that had his cell phone number after he went bankrupt the 2nd time. The few times that I called him and got an answer, I was acutely aware from the background sound that he was in a casino.

BigE · January 2, 2011 6:43AM

Probably should mention expensive counterfeit slab/coin or an uninsured act of God or theft could cause substantial loss. I've noticed that truly professional people in their field seem to be able to work their way out some of the worst disasters though

-----------BigE

WoodenJefferson · January 2, 2011 7:03AM

M.C. Hammer Syndrome provides that money is nothing if it doesn't bring peace and if priorities are wrong.

tradedollarnut · January 2, 2011 7:11AM

Ahhh - let's not forget the old double or triple collateral trick. Pledge a great coin or a set as collateral, then do it again, then put it into auction and take an advance. Who gets the cash if push comes to shove?

mrearlygold · January 2, 2011 7:13AM

<< Ahhh - let's not forget the old double or triple collateral trick. Pledge a great coin or a set as collateral, then do it again, then put it into auction and take an advance. Who gets the cash if push comes to shove? >>

291fifth · January 2, 2011 7:25AM

Some dealers know nothing but coins. As a result, they continue to plow their profits into more coins during market upturns and hold those coins when the "correction" happens. This is true of many collectible areas. With coins, at least, there is a chance for a comeback at some time in the future ... if they can hold on to the coins long enough to eventually cash out at a profit. Sometimes the wait can be very long.

I heard of one coin/paper money dealer who got caught up in the telephone card market back in the 1990's. He apparently put virtually all of his capital into telephone cards thinking they would be the next red hot collectible. They weren't. I haven't heard what eventually happened to him. The last I did hear was that he had a huge inventory of virtually worthless telephone cards.

DuCrozat · January 2, 2011 7:32AM

<< .

I heard of one coin/paper money dealer who got caught up in the telephone card market back in the 1990's. He apparently put virtually all of his capital into telephone cards thinking they would be the next red hot collectible. They weren't. I haven't heard what eventually happened to him. The last I did hear was that he had a huge inventory of virtually worthless telephone cards. >>

I hear beanie babies are coming back...

Hopes and dreams are not enough to run a business. Just because you like it, doesn't mean everyone else will. Wish it WERE true though.

LindeDad · January 2, 2011 7:50AM

I would say the lack of a sound education in Business to include accounting and inventory management and marketing. Would be one way to go in the hole in a big way.

BaseballAbs · January 2, 2011 8:18AM

Going outside your means and making risks you can't afford to take.

taxmad · January 2, 2011 8:37AM

<< I have known several coin dealers who were doing well in the coin market. They made good money and spent the profits on a comfortable lifestyle. When most of them passed away, the house of cards fell apart and the estates showed that they were tens to hundreds of thousands in debt. Many of the wives were unaware. Is this anything new?

TRUTH >>

Nor unique to coins. A buddy just took is own life when the bills finally caught up. He was a stockbroker. No Madoff action, just tried to keep giving his wife and kids the lifestyle they enjoyed during the market hay-days. His wife had no idea they were insolvent.

taxmad · January 2, 2011 8:43AM

<< I would say the lack of a sound education in Business to include accounting and inventory management and marketing. Would be one way to go in the hole in a big way. >>

Can I add TAXES to your list. Using sales tax or withholding taxes to pay bills is proof you need to go back to being an employee. The penalties for not paying taxes timely is huge (5-100% in the first month) and taxes do not go away after bankruptcy. Stiff Visa or Mastercard or your light company. They may cut you off, but they won't take your house and put you in jail.

In the world of coin dealing, how can a US coin dealer amass extremely large losses?

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