By Rick Snow – Owner and Operator, Eagle Eye Rare Coins ……



I have written about the problem of overgrading for many years now.

In 1996, I began a service called Photo Seal. In small ways it has helped control the problem within the Flying Eagle and Indian cent collector community, but we are now closing in on 30 years of certified grading.

Over the years we have seen an ever increasing amount of coins being certified with grades that can only be described as overgraded. These coins do not disappear from the market; in fact, they tend to have a multiplying effect. Once graded, they are placed in the marketplace, usually at auction. There they tend to sell for below market prices. The original submitters reap their profit and from then on the coins are traded at a discount, from auction to eBay to dealer’s inventory to eBay again and then back to another auction, never finding a final resting place.

The real problem is that each public sale is a lower data point for the price guide editors.

The grading services – PCGS and NGC, both have a business model of ever-decreasing returns. They are fighting for submissions. The more coins they certify, the less coins there are to submit. This is the law of diminishing returns. If standards remained fixed and equal between grading services and the same standard were applied to coins year after year, soon there would be no reason to resubmit an already certified coin. There would be no incentive to crossover a coin. There would be no incentive to choose one company over another.

To keep coins coming in they have used all types of revenue enhancement strategies to keep coins being graded and regraded. This is business. They walk the line between respect and ruthlessness as in any corporate culture. As a submitter you want the greatest return for your coin. Most dealers would send a coin to whomever they think will give them the highest grade. This increases their profit. I think most collectors just want their coins graded correctly. If a grading service caters to one group and gives out “gift grades” to large submitters, they run the risk of alienating the other group who demand accuracy.

The problem now is that the majority (50% to 75%) of the coins in slabs are overgraded by the standards set by the grading companies in the 1990s. As a collector, you have to acknowledge the problem. There are two choices you can make in adding coins to your collection: buy the coin in the holder or buy the coin regardless of the holder. Your personal attention to quality does not fix the problem of these overgraded coins lowering market prices. It might even make it worse if there are fewer buyers of these coins.

The problem can only be fixed by the increased awareness that auction prices of just any slabbed coin is not the best way to record the market or determine the value of a coin. Auction sales must be judged on the quality of the coin, whether it’s properly graded or not.

An Accurate Price

So, what price is an accurate reflection of the coin being considered?

It used to be that price was a reflection of the dealer-to-dealer market where both buyer and seller had experience and knew how to grade. If two dealers agree on a price of a coin, it can be argued that the coin is correctly graded and correctly priced. There are a multitude of other factors, but the basic premise is there. From there, a reasonable mark-up of 10% to 30% is applied and a retail price, or “ask”, is established. This is what used to be listed in the price guides.

Another way to determine a price is to use auction records. With the advancement of easy-to-reference auction records, this is the way most dealers and collectors determine an average price (the established printed price guides are now an afterthought). Although it seems on the surface a fair way to judge a market, it is, in the face of massive overgrading, a very destructive practice.

To show you the problem, we will look at one grade of one coin and examine how overgrading has hurt the market. The 1877 Indian cent in AU50 condition will do. The proper grade is–and has been for the modern, post-Photograde era–defined as “Some original luster remains. Some marks. Obvious wear.” The image on the previous page is a properly-graded 1877 in AU50. The example is PCGS-graded and PhotoSealed, or (PS). My records show that this coin sold for US$4,500 in 2013.

This next coin is PCGS-graded AU50 that I sold for $3,000 a few months later that is not PhotoSealed. The reason is that I felt it was merely an XF40, not AU. Notice how the lower hair curl is nearly connected to the ribbon? There is no original surface luster remaining. There is obviously a big difference in quality, which is the reason for the big difference in price. Confronted with this simple explanation it is obvious why a collector might want one over the other – quality and price. The $3,000 coin might fit right in a collection where the $4,500 was out of budget. The $4,500 specimen might have the look that the new owner had been looking for for years without luck, assuming price is not the main concern.

I hope this clearly shows the wide differences in similarly-graded coins. The date should not matter. The prices assigned by the seller (in this case, myself) were derived from research into what other examples of the same quality have sold for in the past. I did not use auction records. There is always give-and-take in arriving at a price and buyers should have a say in that process. If the established market for a (PS) AU50 is $4,500, then the price paid by the dealer to acquire it should be in line with that as well. Probably in the $3,750 to $4,000 range. This is a 25% to 12% margin. The non-(PS) coin above is an XF coin in a AU50 holder.

It may have been bought for XF money (about $2,500) because it is obviously not an AU50. To move it out quickly, it is offered at an attractive price for an AU50, maybe $3,000. This would be a 20% margin. Both instances are the correct way to evaluate the coin based on its quality, not the grade on the holder.

Now if these coins were sold in auctions, they would probably bring between $4,000 for the (PS) and $2,700 for the non-(PS) coin. Auction buyers are usually pretty savvy and they don’t stretch on a coin unless it is something special. The first coin shown is special. It would be a great coin to own for a collection of AU Indian cents. If I bought it, as a dealer I would hope to be the winner of both pieces at the prices stated above, although I would much prefer to buy the first one for $4,000.

This is hypothetical, as both coins were not acquired in auction. If put in an auction, we don’t know what price they would fetch. If no one bidding knew that the market for a properly-graded AU50 was $4,500, then they might think that anything over $3,000 was too much.

Why would they let it pass for so little? Auction records.

Some Sample Auction Records

The sales I list here are the only sales I found of 1877 Indian cents in certified holders graded AU50 over the past few years. Very few have sold so we have to go back to 2012.

None of these have any acceptance stickers from CAC or (PS). This may mean they were sent in and rejected, but we can’t be sure. To me, they both look overgraded. At that time, the PCGS price guide showed $2,950 for AU50 and Coin Wold Trends was at $2,750. These coins sold for a bit below the PCGS and Coin World prices… perhaps it was the lack of a CAC sticker or just overall quality.

But what happens next is that the price guides report these sales as what they believe are true AU50 coins.

The $2,585 and $2,443 prices represent prices for XF coins because I think most people who actually viewed the coins think that they are XF coins in AU holders. These prices represent the real market for XF, but it is getting reported as prices realized for AU coins. What has happened is that the market of AU50 has shifted from properly-graded coins to overgraded coins. Now, the accepted market price for AU50 is $2,500 to $3,000 where it should be $4,000 to $4,500. Overgrading and pricing based on overgraded coins has lowered the price.

Here are two sales from 2014. By that time, the PCGS price guide had been lowered to $2,600, reflected by the sale of the two prior coins. Coin World Trends still listed a price of $2,750. Both coins were PCGS-certified long ago (over 15 years prior) and recently CAC-accepted. Decent coins, but not what I would call AU even though CAC accepted them. The top one has dull surfaces that are not original. The other has good surfaces but too much wear for AU. These two auction results show that a value for these coins is about $3,000.

It’s easy to understand that when two PCGS/CAC AU50s sell for $3,000, then that is the market saying what these coins are worth. What is not easy to understand is that by standards in use since the 1990s these coins should all be called XF. The market for a correctly-graded XF is $2,500, and these auctions reflect that clearly, with maybe an extra premium for the higher grade on the holder and the CAC sticker.

Paying $4,500 for a properly-graded AU50 is looking like more and more of a stretch based on these auction results.

We are seeing coins that are actually XF being systemically graded as AU50. Note that none of these have any detail on the diamond nor do they have original surface luster. Lets look at an NGC-graded coin now. This example is the only recent auction I found of an NGC-graded 1877 in AU50. This is a low-end XF at best since it has heavy marks, no luster and a good amount of wear. It sold in 2014 for only $2,232, obviously due to its low quality.

Risk Aversion and False Equivalency

Now, you might be asking yourself, So what? What does this have to do with my collection?

It has everything to do with your collection, and the value of it.

The 1877 that was shown at the beginning of the article sold for $4,500. That is the real market price for a properly-graded AU50 1877. Would you pay $4,500 for it?

Probably not, and the reasons are risk aversion and false equivalency.

We are trained to be risk averse when it comes to buying coins. We want to know that what we are paying is a fair market value. We don’t like to be over charged. When we pay $4,500 for a coin and put it in our collection, satisfied that our long search for that special coin is over and then we see auction records for similarly-graded coins selling for $2,000 below what we paid, we not unjustifiably get a bit angry. To compensate, we may set our budget for the 1877 AU50 at $3,000.

This is risk aversion.

20 years ago, I began to warn against judging equivalent value with similarly-labeled coins in slabs. Others have too. Q. David Bowers, a charter Fly-In Club member has repeatedly written about cherry-picking for quality. He would also remind you that you have to pay-up for quality when it is found.

Using only the auction records for one year, we see that there was no equivalent sale for a properly-graded 1877 in AU50. How can you pay-up for quality when nothing is available? How can you evaluate the market when there are no coins of similar quality have been sold? Even the CAC-accepted coins did not measure up, and the market has given great weight to that acceptance.

When we attempt to figure out the proper price of a coin, we use an equivalency factor. A true equivalency factor would be to look at the coins and judge them side-by-side, determining the proper value based on a past sale price of one of the coins. A false equivalency would be to judge the coins based on the holders and the acceptance stickers they do or do not have.

We see from past auctions of AU50 1877 Indians that they all had issues that suppressed their prices realized. Now the market is accepting the value of these overgraded coins for the real value of a real AU50.

Why? Let’s look at the pricing guides.

Coin World trends lists an AU50 1877 at $2,750. Coins Prices magazine gives $2,850. The PCGS price guide lists it at $2,600, and the NGC price guide lists an AU50 1877 Indian cent at $2,790.

The Fly-In Club price guide shows $4,500. From my point of view, if I were judging the market for all AU50 1877 Indian cents that I saw that really made the grade, I might say they should be $5,500 because they are so rare. I haven’t seen one for over a year!

From a collector’s point of view, given what the pricing guides say, you might think that $4,500 was an insane amount to pay. Now that we have a clearer understanding of the true pricing equivalency based on actual coins and a false one based on holders, we should see the problem. We are faced with an entire market based on a different standard. Either we adhere to that standard or choose to ignore it.

The EAC (Early American Coppers) long ago fought against this very problem. They stuck to a standard that was unchanging and unrelated to the slippery grading standards we call “market grading”. It only works because most EAC collectors abide by it. Most EAC dealers do, too. Even auction companies list an EAC grade beside the certified grade.

If you apply market pricing guides to Large cents, then you find out quickly that all you’ve been able to buy is a collection of low-end junk.

From my perspective as a buyer and seller of coins on a standard that differs from the overall marketplace, I have found that in today’s market I have a hard time buying properly-graded coins and a harder time selling them for a fair market value. Buyers are looking at equivalent pricing for coins of vastly differing quality. Who would pay $4,500 for a coin that is listed at only $2,600 on the PCGS price guide? And if you do buy it, who are you going to sell it to down the road? The next dealer will pull out his computer and show you the “real” market says $2,600.

Conclusion

So, what is to be done? I have maintained a pricing guide for (PS) coins called the Pink Sheet since 1996, but I’ve found that more and more, collectors are becoming slaves to the easy access of online prices realized. Collectors routinely use price guides based on auctions and eBay completed listings without comparing the actual coins. From my point of view, it has become very hard to buy proper coins and the work involved is frequently not rewarded by eager collectors waiting to buy them. They say the coins are overpriced.

I believe that when a properly-graded AU50 1877 Indian cent finally gets to an auction, it will go for close to $4,500. We’ll have to wait and see. If I owned one I would be afraid to sell it at auction. The collectors in the general market do not see those coins enough to know what they are worth. I see barely one or two a year. If one did come up for auction and it sold for $4,500, then it might be seen by the editors of the price guides as an aberration and discarded as a data point.

The broader market in general mirrors what I have gone over using the 1877 AU50 as an example. It seems that all series have been systematically overgraded by all grading services. This has dissipated any upward momentum in pricing they would have normally had if grading were consistent. For example, the pricing in the Greysheet lists an AU50 Indian Cent at $2,175. In 2010 it was $2,450.

Has demand dropped so much for a coin that is actually quite scarce?

The answer is systemic overgrading and a change by the editors of that guide from using dealer purchase data and bids to the easy route of looking at auction data.

Prior to certified holders, when a dealer sold an XF 1877 as an AU he was overcharging only one customer – the market would not be effected. Other dealers wouldn’t let that dealer get away with this in transactions with themselves, so by everyone using the same standard the dealer-to-dealer market was self-correcting. The value of an AU was known. Well-known.

Now, with values based on certified holders of various quality, the data is misleading.

When the grading services came along, their stated mission was to stop overgrading and create a single unified market standard. They did this, at least for while. In the early 1990s I noticed that they were grading full red Indian cents very loosely. Coins with spots, coins that were red-brown but in RD holders–and coins that were just plain ugly–were getting grades that were not appropriate. Nowadays when you come across a RB in a RD holder, you assume it changed. In my experience, most of them were graded wrong and overgraded to begin with.

So I started labeling the coins that I felt made the grade.

Consumer protection, in a way. Market protection, is more like it.

By making a market in properly-graded coins, I felt that I could counteract the problem. For a while it worked. Prices for gem full red Indian cents soared. But the problem of a false equivalency arose. Only a small group of dedicated collectors understood the differences in the value between a properly-graded coin and the overgraded coin in the general market.

With overgraded slabs becoming the majority of coins in the market now, prices are forced down. For AU50 1877 Indian cents, it has dropped. How many VF and XF 1877 Indian cents have been graded as AU50? The same is true for all dates. The same is true for all series. The market is now placing that $2,500 value on what is, in reality, an XF coin!

I am now going to talk in general terms reflecting not just the 1877 Indian cent in AU50, but all series and the forces that are eroding their values.

Recently, Stack’s Bowers acquired the 57th Street Hoard. It holds a million coins in many denominations. In a recent issue of Penny Wise, the journal of the EAC, 26,000 large cents were examined. How many Indian cents are in this hoard? 100,000 might be a low estimate. Anyway, the coins in the 57th St. Hoard were all graded by NGC and are being sold at auction through Stack’s Bowers, Teletrade and on the Stack’s Bowers web site at fixed prices.

From what I saw personally, not just Indian cents but Large cents and other series, the vast majority are what I would kindly say were severely market graded. I put this observation out only to highlight an example and not to cast aspersions on the hoard, Stack’s Bowers or NGC.

So in general, when one coin gets overgraded, the owner makes a bigger than normal financial win. When he sells it, he’s able to say with a clear conscience that it is “correctly graded” because it says so. No auction is going to put in their description. “Looks like a grade lower to our eyes”. They would not get a second consignment.

So it sells rather cheap for the grade.

It should, of course, sell for the grade the coin actually is, not what the holder says. That is what happens, over and over and over again. And the price guides pick up on that. Soon they notice lower and lower prices at auction for these certified coins. The market prices drop. Collectors are now thinking they paid too much for their carefully-selected coins. Apathy sets in and some may even put their cherished coins away. They certainly won’t be thinking about bucking the market trend, would they?

—Rick Snow

