Thoughts About Grading and Pricing

Grading 1850 - 1985

Grading is a shorthand way of determining a coins value. The question “what is it worth?” always begins with “what grade is it?”. If a disagreement arises regarding a grade of a coin, the underlying reason is always money. Much confusion has been made regarding grading over the years, usually the argument is between dealers who push the grade of a coin to get a higher price and collectors who want as good a deal a possible. Confusion is created in the process. Confusion leads to mistakes. Mistakes lead to disenchantment. Disenchantment leads to a declining coin market. It’s easy to think of how our present grading terminology comes to us from the early years of coin collecting. When the first offerings of coins were made in the 1850’s, coins were described as Poor, Good, Fine, Uncirculated, or Proof. These grades do not equate to todays grading at all! I imagine that a Poor coin was anything which would grade VF or less by today’s standards. A Good coin was today’s VF to XF coin, and a Fine was a choice XF or AU, possibly even a low end Mint State piece. Uncirculated pieces would probably be MS63’s and higher today. The “Proof” label was used to describe either an exceptional MS piece or an unimpaired proof issue. It wasn’t until much later that the term proof referred to the method of manufacture rather than some superlative adjective.

At the time there were few collectors compared to the coins, so a coin had to be very special to have enough demand to warrant the dealer asking a premium. As time went on and more collectors entered the collecting arena, dealers were hard pressed to find exceptional coins to fill their orders. In an effort to fill orders, some dealers started to grade a bit looser. So started “Grading Inflation”.

Dealers set the grading standards.

Imagine a 19th century dealer, getting more orders than he can fill on a certain issue. He may find that collectors who request Fine (today’s XF) coins will take a high end Good (today’s VF) coin without any problem. Once he discovers this, he shifts his grading standards down so that now a Good coin is today’s Fine or less and the Fine coin is today’s VF. What then should he call the high end Fine? How about Very Fine. And the real nice Fine? How about Extremely Fine. This subtle shift in grading increases the available coins to sell, and makes the dealer more money. In addition, the period of time when he can buy at one grade and sell at another will make him an additional gain.

Over time the grading inflation crept and crept until the popular books on grading, Brown and Dunn, Photograde and the ANA grading guide locked the circulated grades in print for the ages. Or so we thought. It was felt that overgrading was the second worst problem facing collectors (counterfeits were first). If solid definitions for circulated grades were set down, then the abuses of overgrading would be halted by collector education. A noble thought - but don’t forget that money is involved here. Definitions for Mint State coins were left very vague. This still gave dealers an opportunity to push those grades.

In the late 1970’s, dealers felt that their profit margins would be adversely affected by set grading standards in circulated coins, so instead of pushing the grades on the selling end, they started gouging the grades on the buying end. Collectors were faced with dealers who would scoff at any coin offered to them as not properly graded. “Look - no diamonds! I can’t buy that 1877 as anything but a Fine!”. “This Buffalo Nickel does not have a full horn. It’s no better than a Fine”, (even though it has mint luster). The Early American Coppers (EAC) collectors and dealers, saw this problem early on and “locked” the grades of Large Cents and Half Cents using standards from the late 1950’s and early 1960’s. Collectors were confronted with dealers using strict standards. Collectors became ultra picky in response. Net grading was born. Coins with problems, no matter how minor, now fell into lower quality categories of “Average” and “Scudsy”. Prices rose tremendously for the very few “Choice” coins. However the distinction of what made “Choice” over “Average” was made by the dealer. Now a coin could be average when it was offered to a dealer and choice when sold by a dealer.

The path of least resistance.

When the silver boom hit in the late 1970’s coin prices went through the roof. Since grading was theoretically set for circulated grades, the Mint State and proof grades became targets for grade inflation. Dealers, flush with money from a quickly rising bullion market, poured huge resources into coins and coin marketing. Coins were easier to sell than water in the Sahara. Grades like MS-67 were extensively used on anything nice. Investors new to the coin market, who had no grading knowledge at all were buying these “MS-67’s” with the full trust in their dealer’s ethics. In the early 1980’s, the silver prices crashed. As a direct result, coin collectors stopped buying. The overgraders ran out of suckers to sell to. Prices crashed. When the prices stabilized, the only people left buying coins were knowledgeable collectors who would not accept “MS-67” as anything but a fantasy grade. Dealers were forced to tighten their standards to survive. The old “MS-67” was now “MS-65”.

When ANACS started issuing grading certificates for coins, collectors loved them. Some assurance of set standards was finally being implemented. At last some respected authority was stepping in to protect the collector. Dealers, for the most part, hated them. The grades were strict and detailed any problem with the coin. Dealers would buy them, for sure, but they threw the certificates away when selling and continued to overgrade.

Sight unseen.

In 1986, in the midst of a dead and dying coin market full of collector resentment came PCGS and NGC. They took it upon themselves to save the coin market once and for all. Now a coin would be encapsulated with a grade. To gain acceptance of the holders, and to give dealers a reason to keep the coins in the holders, a market was developed to give value to the “Slabs” over uncertified (or “Raw”) coins. A “Sight unseen” market was devised by the principles of PCGS and others. Dealers would post bids for slabs and be required to buy them on demand. A firm value was given to slabs based on this market. It must be remembered that the sole reason for starting the sight unseen market was to give slabs added value over raw coins. Submissions poured in.

Within a year, most dealers were on the slab bandwagon. PCGS and NGC were grading very tight. Coins which sold as MS-67 in 1979 were getting grades like MS-63 or MS-64. A coveted MS-65 was a real rarity in any series. Excitement filled the bourse floors once again. Sure, anyone who bought coins between 1978 and 1982 saw the grades of their coins go down 2 to 3 points, but hey, this was the new era. It’s was all starting fresh!

The coin market of the 1990’s.

New market forces were felt with slabs. The sight unseen bidders leap-frogged each other in an attempt to be the buyer of the coins being graded. Bid prices soared to unimaginable, and unsustainable highs. As the prices went higher and higher by nothing more than dealer speculation, a “bubble” market was created. As with any bubble market, the end was quick and unpredictable. By August 1990, coin sales had dried up and coin prices were in a free-fall.

No dealer wants to buy in a declining market. What caused the crash? Loans on coins. Shaky business practices. Overextended auction credit. Collector markets drying up. Hoards of Silver Dollars being graded - more than anyone could sell at $600 for MS-65’s. All these things contributed to the crash, but the true culprit was the sight unseen market.

In late 1990, all bids were either removed or lowered to ridiculously low levels. Any dealer who stuck his head out with a sight unseen bid remotely realistic was in danger of getting dumped on big time! These new low bids, reported in the Certified Coin Dealer Newsletter (Blue Sheet), showed collectors in black and white (actually light and dark blue) how low the sight unseen market had fallen. Collectors and dealers alike took these depressed bids as the real market. Collectors would ask why a certified coin was worth less than a raw coin. The answer was difficult to translate to anyone not familiar with what those prices meant. The truth is they meant nothing. The new low sight unseen bids were too low for any sane dealer to actually sell into. They were however a great tool to buy coins cheap from collectors. Who could argue when the price is right there in print. Dealers began using the Blue Sheet as the Bible of pricing tools when buying, and only for buying. Many do today. Most of the prices are still meaningless.

Sight seen.

In the early 1990’s attempts were made to fix the sight unseen market. “Sight-Seen” trading went into effect, where dealers would indicate their bid, but could limit quantity or quality. This makes for higher bids. But it also makes for bidding abuses. A dealer could bid as high as he wanted and make the market record a new price level without ever buying or selling a coin. Any new coins offered at his new bid can be rejected if he so desires. This is a real problem with sight seen trading.

Ask.

Another type of market is an “ask” based market. This is pricing based on actual coins that have sold. Auction prices realized is one example of “ask” based market information. Coin World “Trends” and Numismatic News “Coin Market” are other examples of ask market pricing. In the early 1990’s a small group of dealers, concerned with market abuses, myself included, called for an ask based market to be created, or at least to be reported. It seemed an effort of futility because collectors wanted, and would pay for, “bid” information, while “ask” information, though a more accurate reflection of the market, was not as highly valued. Note: As I write this, Dennis Baker - one time Editor of the Coin Dealer Newsletter has begun publishing the “Numismedia Fair Market Value Price Guide” which lists the current lowest ask prices in the market. In my opinion, this is the most accurate market guide available. (www.numismedia.com for details)

Bid-Ask.

In the Coin Dealer Newsletter, ask prices are set as a small percentage over the bid price. (or the bid is set as a small percentage under the ask price). These prices are used by collectors to buy coins at prices they hope to be as cheap as they can get. At the same time, if the opportunity arises where a collector wants to sell a coin, they may try to get the bid price from a dealer. However, in a market where there is no grading, such as Mint packaged Proof sets and Commemoratives, the collector is faced with one question: how cheap can I get it for. Most collectors are happy to pay Grey Sheet ask. The dealers, knowing this, cannot survive making a 7% profit allotted for in the bid/ask spread, he must increase his profit by buying the proof set 10% or more in back of the bid price. The dealers buying pressure then is to also buy the coins as cheap as possible, not compete to pay the most. The same thing happens with the more common certified coins. An ask based market tends keep common coins depressed.

Grading 1990-present.

As I discussed earlier, when PCGS and NGC began certifying coins in 1986 their standards were much stricter than those used for raw coins at the time. Old MS-67 coins were now MS-64 or so. This hurt collectors in the short term, but the market began to rise in response to the tougher standards. The buyers of the new slabs were getting super coins for the money. This was necessary to insure widespread acceptance of the PCGS and NGC slab. Earlier attempts at encapsulated grading (by NCI) failed due to very loose grading. It is true that collectors desire quality and will stand by those who deliver it.

Everyone had to relearn Mint State grading standards. Dealers who submitted coins learned very quickly what a coin would grade at the services. Collectors gained a sense of trust in slabs, many to the point of not even caring what the coin inside the slab looked like. Blind trust can be very dangerous.

After the market crash, submissions declined. The law of diminishing returns holds true for certification services - there are only so many coins that can be certified. Now, since I have never been an insider to the decision making at PCGS and NGC, I can only speculate on their motives. As a dealer with hands on experience in the market during this time, I can say for a fact there has been a steady inflation in grading at the grading services. I can relate some experiences and observations that will make you sit up and take notice.

The regrade is born. In an attempt to boost submissions, PCGS instituted the guaranteed resubmission. This was a no lose deal (except for the submission fee) for dealers. Any dealer could send in an already graded PCGS coin and it will be guaranteed to be graded higher or remain the same grade. It could not go down in grade without PCGS compensating the owner. Sounds great. What it did was open the flood gates for all those strictly graded coins from 1986-1990 to be regraded into higher grades.

I recall having a hard time finding Gem MS-65 Washington Quarters. They all seemed to have scuff marks on the forehead. In 1991, a group of rolls were bought in an auction, submitted to one of the services (check the populations in MS67 to see which one) and sold on Teletrade. Coins that I would have graded no better than MS-63 were being graded MS-65 and MS-66. The Washington Quarter market collapsed in a few months.

Bust Half Dollars are very scarce in MS condition, but very plentiful in AU grades. I remember regularly seeing AU Bust Half dollars getting MS grades during this time. Indian Gold Half Eagles and Quarter Eagles are almost impossible to find in MS grades due to the incuse design. After 1991, the flood gates opened and nearly every AU Indian Gold coin was being regraded as MS. Every series was being regraded.

There were many different phases in the regrade scheme. Many dealers devote 100% of their resources to resubmissions. At times when resubmissions came under fire, it seemed that the services would tighten up on resubmissions. Dealers would then crack out coins and hope for the better grades through the normal raw submission route.

I recall being given first shot at a collection that another dealer was getting returned from PCGS at a coin show. This was last year. The coins were mostly graded MS-65RD and MS-66RD. However, to my trained eyes not one of the coins met the criteria for being full red. There were MS-64RB’s graded as 65RD’s, MS-65RB’s graded as MS65RD’s, MS64RB’s graded as MS66RD (!) and so on. Whoever was grading that particular day obviously had no idea what a full RED Indian cent looked like. My pain was not so much the fact that I was not buying the collection, it was the effect these coins were going to have on the market. When an overgraded coin enters the market, it’s like a hot potato that no one want’s to hold. It gets offered real cheap eventually and some collector gets stuck.

To this day this grading inflation is continuing. Recently, an obvious change occurred with modern proofs and commemoratives. Prior to last year very few coins graded PR-70. Collector were paying fancy premiums for PR-68 and PR-69 coins. Now, many more PR-70’s are getting graded. The value of the previously graded PR-68’s and 69’s (forget about 66’s and 67’s) will crumble since there is now a higher grade to get. Is this the end?

The grading game continues. Today, new grading services are opening up with strict standards and a vow of integrity. The new services, ICG and SEGS can, if they desire do the hobby justice and grade consistently for a 10 years and then fold up shop when all the coins are properly graded. But what is happening? The new tightly graded coins are being bought, broken out and sent to the service who is grading the loosest at the time. It’s a vicious cycle. Greed will conquer all noble intentions.

Today’s market.

Today the market is in chaos with respect to pricing. What is a properly graded MS-65 worth? What is a MS-63 in a MS-65 holder worth? What is a MS-65 in a MS-64 holder worth? With so many varying qualities of slabs out there, no pricing guide can accurately reflect the market. A newcomer who sees the slab as a shortcut to learning grading will soon find himself buried in all the undesirables lurking on the internet auctions. For those who know how to grade properly and consistently, these are great times. For those who don’t, it’s another slaughter waiting to happen. The sight unseen market is dead except for the most common and generic issues because of this grading problem. Anyone who bids expects an overgraded coin. Few dealers sell the best coins wholesale. The ask market is in chaos. Prices in auctions can vary widely for coins in the same holder, called the same grade, and sold right next to each other in the same auction. Correctly graded coins have a strong market. The others flop around from dealer to dealer until they find a sucker who only buys the slab.

Solutions.

Photo Seal & the Pink Sheet.

As you probably guessed, I have to talk about Eagle Eye Photo Seal and the Pink Sheet. Brian Wagner and I saw the problem of inconsistent grading early on and fought to stop it from ruining our niche market - Flying Eagle and Indian Cents. After the fall of prices in 1990, Indian Cents were very undervalued with respect to their huge popularity. We believed that a true market should be based on happy buyers and happy sellers. The often quoted dealer joke - ”I took advantage of the other guy and passed the savings on to you” would not apply in a real market. We made a price chart of our sales and added in theoretical sales to fill in the holes. We then made our bid 75% of the retail price. This way any coin that we were willing to sell had a corresponding bid related to it. If the retail price went up, so did the buy price. If the buy price went down, so did the selling price. No abuse is possible if the system is adhered to faithfully. We published the retail prices in a price guide called the “Pink Sheet”.

To eliminate the real possibility of the market being undermined by overgraded slabs entering the market, as had happened with Washington Quarters, and other series, we started Eagle Eye Photo Seal. We stuck a label on the slab that is tamper resistant, cataloged the serial number, and issued a laminated photo card which goes along with the slab. Since two very proficient and knowledgeable graders, Brian and myself were the only two people involved in the process, the consistency was assured.

One of the misconceptions of third party grading is that abuses are curtailed since they do not buy or sell coins. I have the opposing view that because there is little monetary reward or consequence at stake in grading a coin at the slabbing services, it is easy to give “gift” grades on a whim. We, on the other hand are staking our own money, with a commitment to buy any Photo Sealed coin at our bid. We have to be as consistent as humanly possible. Any “gift” Photo Seal will come back at us eventually.

We have operated a market in Flying Eagle and Indian Cents with little fanfare since 1995 without any problems. The coins we Photo Sealed we hope will come back to us in the future. Our consistency is easily seen when we buy coins photo sealed a few years ago. No difference from today. Dealers as well as collectors use our Pink Sheet because they know it has relevance to the actual market. Can other series benefit? Probably, but the longer the slabbing companies grade coins looser and looser, the harder it will be to contain the problem.

What you can do.

One way to combat the problems discussed here on you own is to stand up for accurate grading. If you are offered a coin that is vastly overgraded, write the dealer a letter saying that you only want properly graded coins. Be nice about it though. You don’t want him to stop sending you coins altogether.

I feel that the grading services have gotten off too lightly in this mess. They should be held accountable for their actions. For every coin you are sent, or have bought that is overgraded, you should write a letter to the grading company that encapsulated it saying how disappointed you are in this particular coin. Send them a specific letter for every coin. Request a reply. If they get no collector reaction when they loosen standards, they will keep doing it.

By Richard Snow, Eagle Eye Rare Coins

 

Copyright 2010 Rick Snow
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