There is quite a flap going on in Ohio. Apparently, since 1998, that state’s Bureau of Worker’s Compensation has invested $50 million of its $18 billion portfolio in rare coins. The person who has benefited from this most idiosyncratic diversification move, Tom Noe, turns out to be a Republican bigwig in the state. He has contributed generously to his party’s candidates, and manages the two rare-coin funds that received the unusual investment. Oops.

It gets worse. Further investigation has revealed that at least one person associated with Mr. Noe is a convicted felon, and another is under investigation for having “lost” 121 coins, worth hundreds of thousands of dollars. The Ohio newspapers, and state Democrats, are having a dandy time with this story.

At the same time, a recent rare coin sale in New York presented the exact opposite picture of the numismatic community. The $10 million sale of certain pieces of the Louis E. Eliasberg Sr. rare coin collection electrified collectors and dealers by setting record prices for many lots. Several coins sold at multiples of the top estimates. Ironically, the investment with Mr. Noe may turn out well after all.

The rare coin market usually wafts into view for investors at times like this. According to Scott Mitchell of Stack’s, one of the country’s leading coin auction houses, tepid stock and bond markets combined with some good publicity for the coin world have attracted scores of new buyers. The sale of a 1933 $20 gold piece in 2002 for over $7 million, the highest price ever paid for a coin, stimulated considerable interest on the high end. At the same time, the states’ quarters program and the new Lewis & Clark nickels have got kids sorting through their piggy banks.

There is a case to be made for investing in rare coins, which has little to do with precious metals values. According to Mr. Mitchell, rare coin prices are not linked to movements in the gold or silver markets, though on occasion the same elements will boost prices for both. The positive outlook rests instead on documented price increases for high quality rare coins, and the increasing transparency of the marketplace.

In the 1980s several things happened that changed the rare coin business permanently and dramatically. First, beginning in 1986, the Professional Coin Grading Service began to apply widely accepted standards to the grading and certification of coins. In 1987, Numismatic Guaranty Corporation followed suit. Not only did these outfits bring a more discriminating approach to determining quality, but they also introduced the concept of sealing the pieces in tamper-proof plastic, guaranteeing the product’s authenticity.

Until that time, experts in the field had based their assessments of coins on the Sheldon Scale, which from the late 1940s had described the quality of a piece, ranging from one to 60,and using descriptive words such as “good,” or “fine.” Today, both of the major grading services require the judgment of more than one appraiser, and the determination of quality is much more precise.

The development of plastic casings, called slabs, meant that coins could be bought sight unseen for the first time. It was only a moment before that development led to the electronic trading of coins. Greater trading volume has led in turn to greater liquidity.

Also during the 1980s, various Wall Street firms launched funds to invest in rare coins, which ratcheted up the industry’s profile several notches, and invited some serious shenanigans. Suffice it to say that Merrill Lynch, one of the pioneers in the area, had to return more than $20 million to investors before it walked away from the field; similar undertakings by Kidder, Peabody, and Shearson didn’t do much better.

Nonetheless, investors in rare coins have over certain periods outperformed the S&P 500. A study by Raymond Lombra, an economics professor at Penn State, determined that from 1978 to 2002 certain high quality coins had risen in value by 14.1% a year, comparing favorably to the 12.8% annual rise in the S&P 500, and the 10.6% annual return of Treasury bonds.

Interestingly, gold bullion prices during the same interval increased at only a 3.1% rate, testifying to the independent track of rare coins.

The Penn State study concluded that high quality coins outperformed those of lesser grade. This generalization can be extended to most tangible assets; when buying for returns, experts consistently advise selecting the best art, or wine, or property you can afford.

As rare coin investing regains some popularity, investors should be reminded that this is an extremely tricky investment category. There are so many scoundrels in the business that the Better Business Bureau was moved to write a guide on how to avoid them. The market is unregulated, and extremely volatile. There have been dramatic price swings in the past 20 years.

Coins, like most tangible assets, are typically marked up 20% to 30% wholesale to retail, and can still be quite illiquid in spite of the increasing trading activity. Burnett Marus, a registered financial consultant who has been advising his clients on rare coin investing for many years, recommends that purchasers assume a five-to-seven year holding period.

Mr. Marus also suggests that buyers “only invest 5 to 10% of their total gross assets, and that they commit a minimum of $10,000.” In other words, only the wealthy should even consider rare coins.

Mr. Marus is the author of a book called “Rare U.S. Coin Investment: A Practical Guide for Financial Advisors.” It is quite a comprehensive and comprehensible guide to investing in this sphere, and an excellent source for anyone interested in committing capital to coins.

Though cautious, Mr. Marus thinks that there is “absolutely room for rare coins in someone’s portfolio.” He recommends that investors do their research. There are many segments of the market and, just as in the art world, not all types of coins move in unison.

This is clearly evident from the recent Eliasberg sale. Among the lots that went for the highest prices were Korean coins. Just as in the art world, just about anything Asian is hot.

The best news about rare coins? As Mr. Marus points out, “they won’t go bankrupt.”