In my last article, the 1965-1970 Kennedy Half Dollar was recommended as a coin that will participate in the big price moves we expect in the unfolding silver bull market, but also put a floor on any losses an investor may experience as a result of unexpected events. A deflation scenario was the unexpected event we discussed.

Based on the number of replies I received, the subject was obviously of some interest, so I take this opportunity to follow up by examining other potential deflation-proof coins as well as answer a few questions.

Firstly, a few folk told me that gold should go up in a deflation. I already conceded that possibility in the previous article if the deflation was accompanied by a systemic banking failure or the fear of it. However, I would also point out that this is not a black or white issue. With the Federal Reserve and other central banks inflating like mad against a deflation led by debt-default, we clearly have a battle of two monetary phenomena. Like two men in an arm-wrestling competition, you examine their biceps and make a judgement on who is going to be floored. My bet is still on the Fed and their friends winning, but as our two arm-wrestlers strain and sweat every sinew, the final outcome may not be clear as the two clenched fists swinging indecisively from side to side.

The lesson of Japan's deflation and the actions of the Japanese Central Bank shows us what happens when a central bank flexes its muscles - deflation is reduced to a benign state but they end up with a huge government debt to GDP ratio. However, if the whole Western economy is in such a state, the situation is less clear.

But moving onto gold deflation coins first, I have to say that the choice is pretty meagre. The table below shows a selection of various legal tender gold bullion coins. The important last column is the price gold has to drop to in order to match the face value of the coin in question. The US dollar face values for each coin are calculated from current exchange rates.

As you can see, a lot of coins offer no protection whatsoever. The best standard bullion coin is the British 1oz Britannia, but with the entry of Britain into the Euro undecided, we also are undecided about the future legal tender status of the British Pound!

The last entry is the most interesting one. Alongside their famous Maple coins, Canada has since 1990 issued various commemorative gold coins with a face value of 200 Canadian dollars. The other fact is that these are half-ounce coins giving a floor price of $321 at current exchange rates. That's a pretty good deal being 25% below the current spot price of $427!

What is the down side of this type of coin? The answer is numismatical value. A look at completed auctions on eBay showed that most of these coins went for high premiums due to their low mintage numbers. I saw prices going hundreds of dollars over the spot price, which is clearly unsuitable from a bullion investment point of view. However, I also saw one or two bizarrely go for under spot at $178 while one went for $297 or 40% over spot. The tactic here would appear to be either to try and buy in bulk or shop with patience, a 40% premium over spot compared to the single digit premiums for common bullion coins effectively lowers the floor price from $321 to less than $250 plus you buy less gold for your money.

Moving onto common silver bullion coins, we present a corresponding selection below:

The picture is better here than gold with the Britannia and Maple coins actually coming in ahead of the 40% Kennedy Half Dollar but the rest are a mile behind. However, the best premium on Maples I saw was about 20% over spot price while Britannias were even worse at 100% over spot price and beyond! Since Kennedy halves can be purchased at close to spot price, they are still the winners in the deflation coin portfolio. I would point out though that as a further hedge against the US dollar under performing the Canadian dollar in a deflationary scenario, the Maple looks a good inflation/deflation investment.

Overall, exchange rates are important. Since the US dollar began its rally last December, other currencies have fallen against it. For example, the British pound in December reached a multi-year high of 1.95 dollars, this would change our floor value above from $3.51 to $3.90 whilst in 2001 the dollar was strong at 1.37, giving a floor of $2.74 on a 1oz Britannia. To further complicate the picture, the price of silver was also fluctuating in price between $4 and $8.50 during that time period. It is a matter of debate how each currency would perform against each other in a future deflationary collapse, but clearly the private and government debt levels of that country would be an important factor.

One final point was an email from a reader who said that 40% Kennedy bags went at a deeper discount to 90% bags and bars during the melting frenzy of the late 1970s. I concede that, though I checked with another dealer of that period who said that both were equally discounted. I would have to conclude that both situations prevailed across the United States at that time. In the search for deflation insurance, we don't want to sacrifice inflationary upside potential when the silver is cashed in.

I thought about this and had a look at how completed sales of 40% Kennedy coins had performed on eBay over the last few days with silver at $7 an ounce. For lots of 200-1000 Kennedy coins, the average purchase price was $1.08 per coin or 4% over spot price. A similar analysis of 90% Kennedy lots gave an average price of $2.61 per coin or 3% over spot. So, from the perspective of eBay and the new form of coin dealing it offers, there is no real difference when unloading these coins. How these premiums would perform in a future red hot silver bull market is left to our speculation.

So, I will continue the search for good deflation hedge coins which also uphold the prime reason for holding bullion coins - supply shortfalls, inflation running wild and a return to real money. If I find anything better than the above I will report it to subscribers in the next issue!

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk