(MONEY Magazine) – My dad collected things. Our house was filled with 19th-century furniture and glassware. He also had stamp plate blocks, coins and even Chinese snuff bottles, which he displayed in a little mirror-backed case he had made himself. The central part of our house was at least 150 years old--we found square handmade nails in the walls when we did some renovations--so most of what my dad bought went well with the decor.

That was fortunate because it all turned out to be practically worthless. After my dad died, I was executor of the estate and had to dispose of this stuff. The furniture and glassware sold quickly, but not for much. The Chinese snuff bottles brought less than a third of their catalogue value--less than he had paid, in many cases. Worst of all, the coins and stamps were worth face value, at best. A stamp dealer offered me only 85[cents] on the dollar for the plate blocks. When I pointed out that I could get full price by using them to mail letters, he told me to go ahead.

That experience confirmed my instincts about collecting. Only rare things retain their value, and even they are illiquid. Selling is such a pain that collectibles can not really be considered as investments.

And yet I find myself intrigued by the idea of buying gold coins. Almost all of my savings are in financial assets. I own a couple of mutual funds and stocks, of course, and loaded up on more when the market sold off last fall. Since then I've been selling little by little, realizing profits. The only trouble is, I can't find much I want to buy with the proceeds. Cash is piling up in my account--and it's driving me crazy. So I've started thinking about putting a little money in gold. Maybe I've been listening to too much Wagner, or maybe I'm starting to turn into my dad. I decided I wouldn't reason why. Instead, I thought I'd just investigate the market for coins and see what I could find out.

It isn't hard to learn the basics. Open the Wall Street Journal and you'll see ads measuring two square inches for gold coins sold by firms like Blanchard & Co., which claims to be the largest rare-coin retailer in the U.S. If you telephone the companies that run these ads--or consult their Websites--they will point out that gold is exceptionally cheap today, that inflation is more likely to rise than fall over the next decade and that top-quality coins have outpaced stocks at some points in the past.

Those arguments are all true but ought to carry some disclaimers. While there was a monster run-up in the price of gold coins during the 1980s (because of fears that inflation would take off again), the really big profits have accrued only to the highest-quality coins--and even those performed badly from 1989 through 1995. In fact, $20,000 invested in rare gold coins back in 1982 would be worth only $28,345 today, according to one index. By contrast, the same investment in an S&P 500 index fund would be worth more than $286,000. Could coins outperform stocks again? Yes, but only if inflation becomes a serious threat.

Nonetheless, the rare-coin market is perking up. Part of the reason is that stock market profits are spilling over into more exotic investments. In addition, people who are worried that the Y2K bug will disrupt the banking system have been loading up on small gold and silver coins. The U.S. Mint can't keep up with demand for 1/10-ounce gold pieces. And bags of $1,000 worth of circulated silver coins, which used to trade at the melt value of the 722 ounces of silver they contain, now change hands at premiums of as much as 50% over melt.

The biggest boost to rare-coin prices, though, seems to be coming from new buyers trading on the Internet. You can find links to the Websites of more than 100 dealers who buy and sell this way by going to the dealer referral page at the Certified Coin Exchange (www.atchou.com).

The prospect of buying coins over the Internet made me a little paranoid. Was I really going to send a check for $1,000 or more to some address on a Website? And get back what? Maybe a counterfeit--or maybe gold foil filled with chocolate.

In fact, buyers of investment-grade coins don't need to worry too much about counterfeits, thanks to the growing popularity of third-party grading. Firms such as the Professional Coin Grading Service (PCGS) and Numismatic Guaranty Corp. (NGC) have professional graders examine a coin. Then it's "slabbed"--that is, sealed in a numbered holder showing the grade.

Objective coin grading is vital because two examples of a rare coin that look equally good to the average person can differ in value by thousands of dollars. An untrained buyer can also be fooled by a coin that's been cleaned. Buffing with even the mildest abrasive devalues a coin. It may look shinier, but experts will spot the tiny scratches caused by cleaning.

Without third-party grading, Internet buyers would have to rely on the seller's grading of so-called raw, or unslabbed, coins. The built-in conflict of interest is obvious. But with certified coins, you can buy over the phone or on the Web as long as you stick with reliable dealers.

Buying certified coins from reputable dealers doesn't eliminate every risk. Coins could be misgraded. But I figured they were unlikely to be off by more than one grade. So if I stuck with coins that didn't vary much in price from one grade to the next, I should be safe. The third risk was that I would overpay. That's harder to guard against, but you can find a general guide to current retail prices on the Coin Universe Website (www.coinuniverse.com).

Before I get into the intricacies of valuing coins, you need to know a few essentials. For starters, there are several different classes of gold coins. Coins such as modern American Eagles or South African Krugerrands trade at a 4% to 6% premium over their melt value. Old European gold coins, like British sovereigns, French roosters or Austrian ducats, typically carry 15% to 20% premiums. U.S. gold coins minted before Franklin D. Roosevelt banned most private gold ownership in 1933 have larger premiums, of 70% or more. Rare coins from before the Civil War trade chiefly on numismatic value. The most active market for investors is in common-date U.S. gold coins minted between 1861 and 1933 and in uncirculated condition.

Coins are graded on a 70-point scale devised by William Sheldon in 1948. Circulated coins get grades below 60. Mint coins range from 60 to 70, depending on how banged up they got in storage. There's also a separate category for proof coins, which were specially struck to produce exceptionally fine examples. Proofs graded at 60 or above typically sell at far higher prices than mint coins, which were conventionally struck.

As a beginning coin buyer, I decided that the best choices for me would be $10 and $20 gold pieces from the late 19th or early 20th centuries. I wanted coins with some numismatic value but also a fairly hefty melt value. The largest denominations contain the most gold. The $10 coin, which has 0.48375 troy ounce (worth $137 at the recent gold price of $284 an ounce), starts at $260 in circulated condition. That's a premium of 90%. The circulated $20 coins (0.9675 ounce, worth $275), start at $470, a 71% premium. I also decided to stick with slabbed coins certified by PCGS and NGC in lower uncirculated grades, which are actively traded and the easiest to sell.

Although most collectors think the most beautiful coins are those designed by the American sculptor Augustus Saint-Gaudens, minted from 1907 to 1933, I prefer the look of the earlier Liberty Coronet design. And there's no point in being in this game if you don't like the look of the coins you buy.

After checking dozens of Websites, I noticed that dealers tend to fall into two categories. Some are basically telemarketers, who promote coins as an inflation hedge and a way to protect assets. That's a discreet way of saying that you may be able to dodge capital-gains taxes when you sell--and that you can hide wealth from angry creditors or a spouse you're divorcing.

The other type of dealer stressed numismatic expertise. Those Web pages listed the professional qualifications of the firm's principals, including membership in key numismatic organizations. You can double-check such membership claims--and find lots of advice on how to avoid getting ripped off--by going to Websites for PCGS (www.pcgs.com), NGC (www.ngccoin.com), the American Numismatic Association (www.money.org) and the Professional Numismatists Guild (www.pngdealers.com).

Since I still felt a little unsure of myself, I decided to buy from firms that appeared to have solid endorsements. I started with Blanchard. One of the factors that swayed me was that Blanchard has published A Consumer's Guide to Coin Investing and Collecting in cooperation with the U.S. Postal Service (what better guarantee against mail fraud?). Even so, Blanchard has a little bit of a telemarketing feel. I was assigned an account executive who seemed knowledgeable but urged me to trade up to more expensive coins, and who later called to tell me that the market was starting to move and I should get on board. I decided to overlook the pitchman's patter and work with him.

My Blanchard rep convinced me that I should start building a series of coins graded at least MS-62 (mint state). Since I said I wanted Liberty Coronets with the lowest premium over melt, he recommended $20 gold pieces minted in San Francisco. The $20 denomination is somewhat confusingly known as a Double Eagle (sorry, Habsburg fans, that doesn't mean that the bird on the coin has two heads). Since 1838, the standard gold coin had been the $10 piece, known as the Eagle. But after gold was discovered in California, a larger coin was designed. This $20 coin contained twice as much gold, so it was named the Double Eagle. Double Eagles minted in San Francisco in the 1890s are fairly common. Blanchard wanted $630 for the cheapest dates in that mint mark, but I was persuaded to buy three slightly rarer dates priced at $670 to $680.

I also called Heritage Rare Coin Galleries, which is one of the main auctioneers for the American Numismatic Association. The firm's Website had a $330 special on 19th-century $10 Eagles graded MS-61 by NGC. My rep at Heritage was a retired coin dealer who talked with me for more than an hour and found me three different Philadelphia dates from the 1890s at that price.

I asked Bob Green, president of Park Avenue Numismatics in New York City, to value the six coins I had bought. He quoted prices almost identical to those of Heritage, but cheaper than those of Blanchard. I'm okay with that, because I don't expect the coin market to be efficient, like the stock market. But I realized that if I were going to put together a collection, I would probably get the best prices if I found a dealer I liked at a major firm and built a relationship with him.

The big problem in the coin market is spreads. The difference between the buy and sell price on a rare coin can be as much as 30%. The most actively traded coins have spreads of 5% to 15%. Your coins have to appreciate enough to cover that before you earn a profit.

So here's the best advice of all: If coins intrigue you, focus on those you'll enjoy looking at. You'll inevitably start learning about the history of the period you pick. Buy U.S. gold and you'll be reading about the California Gold Rush, the history of the Civil War mints and Teddy Roosevelt's removal of the motto "In God We Trust" from gold coins because they might be used for gambling (Congress restored the motto two years later).

If your historical interests are more exotic, you may even decide to collect coins for their numismatic value alone. I studied classics in college and grad school, and I've already started looking at Greek and Roman silver. For less than $1,000, you can find a Hellenistic tetradrachm with a portrait of Alexander the Great done up as an Egyptian god or an Imperial Roman sestertius sporting a thuggish-looking Nero. My dad would have liked them.

--Michael Sivy