Saturday, September 6, 2008

3rd-Party Coin Grading: The Race to the Bottom

The grading of coins has always been more of an art than a science. Each coin presents a unique set of attributes (both positive & negative), which together embody its desirability. However, for circulated coins, it should be possible (at least in theory) to derive objective measures of the amount of wear visible on the surfaces. The original idea of coin grading involved making the distinction between uncirculated (eg. no wear) and varying degrees of circulation.
Dr. William Sheldon devised a numerical system of grades, from 1 to 70, which he proposed to use as a shorthand expression for a coin's value. Using Sheldon's system, a higher numerical grade translated literally into a higher value.

Time passed, and the value of uncirculated coins escalated to the point where it became important to distinguish between "typical" uncirculated, "choice" uncirculated, and "gem" uncirculated coins. The factors involved in making the distinction between typical, choice, and gem included: Sharpness of strike, Quality of lustre, Number of marks, and Overall Eye Appeal. A gem uncirculated specimen might be worth 2X, or 5X, or 10X the value of a typical uncirculated coin of the same date & mint. The economic implications of a 1 or 2-point difference in grade became enormous in some cases. Problems arose in the rare coin market when the buyer & seller could not agree upon the appropriate grade for a particular coin.

3rd-party grading services arose recently (about 20 years ago) with the stated goal of "solving the coin grading problem". This seemed theoretically possible: The basic proposition was for the owner of a coin to send it to the grader, who would assign an independent grade (for a fee), and then return the coin in a sonically sealed plastic holder. After that, the coin could be bought & sold with no further arguments about its grade. Presto!

The Evolution of The Slab:
3rd-party grading was immediately successful. The initial success of the pioneering firm led to the creation of other grading services. For some time, there were plenty of “raw” coins to go around, and graded coins began to be called "slabs". A market for slabbed coins developed, and the Coin Dealer Newsletter even created a separate pricing guide (The Certified Coin Dealer Newsletter) to assist market participants. The grading of coins was a strong growth industry. The grading services competed on the basis of price, service, and reputation (ie. the perceived value of the 3rd-party grade).

Savvy market participants began to take note of subtle differences between the way each service graded particular types of coins (since grading is an art more than a science, the assigned grade will depend upon a number of subjective factors, as mentioned above). The art of "cracking" coins out of one service's holder for re-submission to a different service (with hopes of a higher grade) was born. Furthermore, it was observed that although the assigned numerical grades were integer numbers, the distribution of the coins themselves was "analog" in nature, so that within a particular grade, there were average coins, strong coins, and weak coins. Some talented market participants began seeking high-end coins with exceptional profit potential at the next higher grade level. These strong coins could be cracked out and re-submitted with the chance that they would make the next higher grade (the graders were human, and the grading process was subjective). Eventually, the percentage of uncirculated coins in slabs became significant when compared to the entire available population, and the growth in grading submissions began to slow. A few problems began to surface.

The 21st Century and the Race to the Bottom:
I suppose that at this point, I should point out that the perceptions that I am about to share with you are purely my own. I have not mustered any objective data or other proof to support my assertions - therefore, you should take this all with a grain of salt.

The dawn of the 21st century brought a disaster (on Sept. 11, 2001) along with an economic recession (the recession was actually already underway before Sept. 11). The recovery from this recession coincided with the start of one of the great coin booms of our time. This boom began slowly, but gathered strength along with the U.S. economy, and really kicked into high gear with the acceleration in the price of oil and other commodities. Boom coin markets are often associated with the relaxation of grading standards. The reasons are somewhat complex, but I can invoke a simple supply & demand argument to explain the phenomenon. More people are seeking high-grade coins (higher demand). The number of high-grade coins is strictly limited (in an ideal world), but is somewhat "flexible" in the marketplace. Relaxation of grading standards permits an increase in the supply of high-grade coins. Grading services are capable of maintaining tight grading standards (at least, within the inherent limitations of a group of human graders), but they are also for-profit businesses. As such, they need to be responsive to the needs of their customers (the people submitting coins & paying fees). The profit motive works to everyone's benefit during a boom coin cycle. However, there is a dark side to this phenomenon. As the 3rd-party graders compete for submissions, one service could relax their standards (just a little), to encourage business. Market participants (attempting to maximize their own profits) crack coins out of old slabs and pay another fee, in the hope (ie. expectation) of a higher grade. Buyers continue to pay (after all, the coins have been graded, and the grading services are there to maintain the standards, aren't they?). Not only that, but prices have been rising, so any “error” in judgment (ie. grade) will be eclipsed by the error of NOT buying NOW! Pressure mounts on the other grading services to follow the first service to a looser grading standard. I believe that the coin market’s long Bull Run initiated the slide in grading standards, which I call the “Race to the Bottom”.

There is ample evidence that these things are going on. This is why the term "OGH" (old green holder) has crept into so many auction & fixed-price coin listings. The implication is that “new” grading standards are looser than “old” standards, and therefore the OGH coin could be a higher grade today (even from the same service!). Dealer wholesale prices (quoted in the Coin Dealer Newsletter) have lagged the retail market significantly. Some of this lag is natural, since the CDN must (by definition) follow the market, but another factor in the lag is the reluctance on the part of knowledgeable buyers (ie. coin dealers) to pay market rate for coins that simply do not meet their personal grading standards. Now, a group of entrepreneurial individuals have formed a new service that will (for a fee) examine a slabbed coin, and ratify the grade assigned to the coin, if the assigned grade meets their standards. A holographic-style green sticker will then be affixed to the slab, to certify it. In other words, they have created a grading service for the grading services!

Over the past four years I have examined tens of thousands of coins of all types in slabs. All of the major services exhibit variability in their grading standards, although I would say that the top two services maintain the tightest control over variance. All of the services make grading errors (both under-grading & over-grading). However, under-graded coins are quickly absorbed by the crack-out specialists, who re-submit until the higher grade is obtained. The result of this activity is that, the distribution of coins at any particular grade level must (over time) tilt toward average and below-average coins. It is my observation that one of the major services (not #1) began to loosen their standards early in this boom cycle, as a way to increase their market share. Auction after auction, I could examine two coins side-by-side of the same type, date, and mint-mark, but graded by these two services – in more than 90% of the cases, the coin from the service with the looser standards had a grade at least 1 point higher (often more). In spite of this clear visual difference, their strategy succeeded well enough to force the other grading service to also grade more loosely, in defense of their market share.

More recently, I have begun to observe an even more alarming trend in slab grading – coins with obvious problems (like large scratches, corrosion, cleaning, or damage) encased in holders that state the sharpness grade with absolutely NO mention of these problems. A couple of the major services have offered grading & encapsulation (ie. slabbing) for “problem” coins for some time – these slabs state the sharpness grade and then the problem immediately below. Occasionally there is even a “net” grade on the slab, to assist with determination of value. This service (slabbing for problem coins) was not perfect, but it provided some protection to the buyer (by guaranteeing authenticity, and pointing out the problem, which could at times be subtle). One major service typically rejected problem coins (returning them in a “body bag”, to use the parlance of the coin market). Early in the current coin boom, minor problems began to be accepted, with a lower “net” grade assigned in order to account for the lower market value of the coin with a problem. In this bold new world of slab grading it is “Buyer Beware” (which, by the way, is exactly how it has always been when purchasing raw coins).

In conclusion, I would argue that the grading services have enriched themselves at the expense of the very market they intended to serve. Their mission ("solving the coin grading problem") has been an abject failure. It is high time to tell the people purchasing slabbed coins in today’s market that "The Emperor is NOT wearing any Clothes”. The grade on that slab you are considering is probably not the same grade the same coin would have obtained from the same service 10 years ago. Knowledge is the buyer’s only protection. It is imperative to know how to grade the coins that you collect, and approach certified coins with an appropriate sense of skepticism.

Sunday, June 29, 2008

The Col. Steve Ellsworth Half Cents

Heritage auctioned the half cents from the Ellsworth collection on May 29, 2008. This auction was the 4th time that Heritage has sold an important collection of Early American Coppers since 2000 (the other sales being the Rasmussen, Reiver, and Husak large cents). I have known "Col. Steve" since he launched his career as a dealer of early coppers in the mid-1990's. His pleasant personality and exceptional story-telling ability make it easy to spend time with Col. Steve. His extensive inventory and marketing style can make it hard to leave his table without at least one new addition to your collection! I was fortunate enough to go along with Col. Steve on a Civil War battlefield tour near Fredericksburg, VA during the 2001 EAC convention, and I can tell you that if you ever get such an opportunity, you must take it - he is an extremely knowledgeable and engaging guide.

The sale of the Ellsworth half cents consisted of only 120 lots, but there were many highlights none-the-less. The undisputed star was the Ellsworth 1796 C2 (with pole) in PCGS AU55. This remarkable coin (LOT 1647) was hammered down for an astounding $120,000. There was not a 1796 C1 (no pole) coin in the set. Also missing was the famous 1802/0 C1 (with REV of 1800). However, the 1802/0 C2 (with REV of 1802) in PCGS VF30 hammered for $8000 (LOT 1653). Some of the notable rarities in the sale included: 1795 C6b (Thick Planchet, R6) in VG8, 1804 C4 (Crosslet 4, w/ stems, R5) in VG8, 1805 C2 (Small 5, stems, High R5) in G6, 1806 C3 (Small 6, stems, R6) in G4, and 1809 C1 (R5) in VG8.

There were also some coins in the Ellsworth collection that were not particularly rare, but which I found to be interesting: The 1794 C5a (R4) in PCGS AU55 was hammered for $9500. The 1795 C1 (Lettered Edge, R2) was PCGS MS62, with a remarkable series of planchet fissures across the OBV - it was hammered for $11,000. The 1795 C5b (plain edge, no pole, R4) had a provenance that went all the way back to Lorin Parmelee in 1890! The Ellsworth 1832 C2 (in AU55) was once in the famous Roger Cohen collection (the Cohen half cents were sold by Superior in 1992, but I did not see any coins from this particular auction in the Ellsworth set). The beautiful Ellsworth 1831 (proof-only issue) in NGC PF65 BN (LOT 1735) brought a winning bid of $14,000. There were other proof-only dates among the Ellsworth set, although he did not complete the proof series (1842, 1845, 1846, and 1847 are missing). The die-state collection of 1804 C6 (Spiked Chin) was also quite fascinating, comprising a total of 16 different coins!

The catalogue from the Ellsworth collection features very nice color photos of most lots, and excellent detailed descriptions. The catalogue should be considered for inclusion in your early copper library.

Monday, April 28, 2008

A tribute to 1799 S189

The inspiration for this posting comes from the latest addition to my collection of early cents. This humble copper coin, dated 1799 marks the end of my 3-year-long quest to upgrade this date. It is a coin that anyone with familiarity in this series can appreciate, both for its simple beauty, and for its outstanding rarity (in nice condition).

This is not my first 1799 - actually, it is the 5th one I have owned. What sets this coin apart from all the others (besides the price, which was considerable) is:
1. The quality of the planchet - smooth medium chocolate brown. The sort of surfaces that are normal on any cent from the 20th century, but not at all common in the 18th century, and decidedly scarce in 1799.
2. The strong date - as a large cent specialist will tell you, with a 1799 Sheldon-189, you generally get your choice of a "strong date" or a strong LIBERTY". The axial misalignment of the dies generally assured that no coins were stuck that year with BOTH the date & the word LIBERTY strong. This coin has an exceptionally strong date and correspondingly weak LIBERTY. I prefer this to the alternative.
3. The REV die chip. Not every 1799 Sheldon-189 exhibits the triangular shaped die-chip on the reverse, between the words ONE & CENT. At some point in the REV die's life, this chip was ejected from the steel die, and all subsequently-made coins show this small die chip. It is one of the "hallmarks" of a genuine 1799 (some coins also show some die crumbling at the dentilation on the rim between the word "OF" and the word "AMERICA". This coin does not show the rim crumbling well, but it is often visible on late-state coins).

There are just two varieties of 1799 American large cents available to collectors, and both of them are very scarce. The famous overdate (S188) is R4 (with an estimated extant population of less than 200 coins), while the normal date (S189) is R2 (with a total population estimate of 600 to 2000 coins).

A genuine 1799 cent (any variety, in any condition) represents the Mt. Everest of most large cent collections. Among all early-date (1793-1814) large cents, there are other particular varieties that are more rare (for example, the 1794 S15). However, if one is building a large cent date collection, there are common varieties available for almost every date (including 1794). The glaring exceptions are 1799 & 1804. 1804 cents are scarce. The things that differentiate 1804 and 1799 (in my opinion) are the quality of the copper and the quality of the strike. An 1804 cent has a good chance of being struck on an average (or better) planchet, while a 1799 most likely will have poor surface quality. Likewise, an 1804 cent will have a high probability of being well struck, while a 1799 has only a 50/50 chance (at best) of a decent strike.

When it comes to 1799 large cents, there are a lot more frogs to kiss than handsome princes!

I am not done collecting large cents. I may (one day) obtain a rarer coin than this one. I also might one day buy a coin that costs more than this one. However, this coin has done two things for me, simultaneously:
> It has enabled me to complete my large cent date set, with every coin in reasonable condition.
> It has enabled me to say I am now a "serious collector" (by current $ standards).

Sunday, February 17, 2008

The Sale of the Walt Husak Collection

Wow! I am still a little stunned by the magnitude of this event in Long Beach last Friday night.
After the long build-up, and the beautiful 414 page catalogue, and the long wait to view each & every coin, and much personal speculation about how the bidding might go, I am happy to report that it was all worth it, and then some!
Walt's sale met all of my expectations, and produced a lot of awesome surprises. I can say it was my privilege to be present.
The rare coin field produces very few stars, but after this sale, we must count Walter Husak among the luminaries in our hobby.
Sheldon, Naftzger, Paschal, Loring, Brown, Robinson, Rasmussen, and now... Husak!

I can't say enough good things about this man, or his collection. A true gentleman & family man who used his passion for Large Cents (and a few million dollars) to create a real thing of beauty - a personal vision translated into cuprous reality!
For breadth, how about 292 of the 295 originally enumerated Sheldon varieties? (301 coins altogether, with edge variations) Does it matter that he did not obtain the S15, or the S79, or S80? Not really. The truth is that he could have gotten them, but probably not in high enough condition to fit with the rest of the set (or, perhaps not at a price that seemed prudent to pay). For quality, how about 55 condition-census pieces dated 1794? (out of 57 1794 coins in the sale) How about 21 finest-known coins for 1794 alone?! Now THAT is passion!

There were enough highlights from this auction to fill a small book. I just want to mention some of the coins that were significant to me. For all the prices realized, I will refer you to the Heritage auction site. You might even be able to get their perspective on the sale. The web address is:

Two coins were notable for the prices they realized. These were LOT 2014 (1793 S13 Liberty Cap, CC-2) and LOT 2050 (1794 S48 Starred Reverse, CC-1). Each of these coins was hammered down for $550,000! The Sheldon-13 traces its ownership back to Joseph J. Mickley (whose collection was sold in 1867) and is 2nd finest known, behind the Eliasberg coin. The Sheldon-48 is the finest known of a very scarce (pop. est. ~60) and famous variety. The coin showed up in a Spink & Son (London) price list in 1972, and was prominently featured in the sale of John W. Adams' collection (Bowers & Ruddy, 1982). The one 1793 chain cent certified mint-state by PCGS in the sale (LOT 2002, S3, PCGS MS62) brought a winning bid of $220,000. The most modestly priced 1793 cent in this sale was LOT 2011 (S-11b in EAC F15) which was hammered for just $8500. The new owner of this coin can feel very good about this purchase. This sale had precious few bargains, but this coin was one. Another early surprise was LOT 2019 (a 1794, head-of-93, S18b graded MS63 by PCGS, and CC-4) which brought an astonishing $220,000 bid!

The momentum swung into high gear during the sale of the 1794's, with bids seemingly coming from everywhere - the floor, the internet, the book, and the phones. Every lot was hotly contested. Many budgets were strained as EAC collectors contended with investors for the best pieces. One coin that I was especially fond of was LOT 2066 (the finest known Sheldon-64, in PCGS MS65). It was bid to $130,000. The single finest known 1794 cent in existence (LOT 2069, S-67, in PCGS MS67 RB) brought an amazing $425,000 winning bid. This shimmering cent traces its pedigree to the Lord St. Oswald collection.

The 11 pieces in the Husak set of 1796 Liberty Caps would be worthy of a museum. I doubt if I will ever see such a stellar group again. After the sale of the 96 Liberty Caps, the investors seemed to be satisfied, and the focus returned to the hard-core EAC collectors who are the backbone of this series. As the sale moved on to the 1796 draped bust cents, the awesome S-93 (LOT 2094, PCGS MS 65 RB, and CC-1) was bid to $140,000. I had not seen any '96 draped bust other than a S-119 (Nichol's find variety) with this kind of eye appeal. Prices for the 1797 and 1798 cents were about in line with my expectations. The 1799/8 Overdate cent (LOT 2192, S-188 in EAC VF25, CC-5) went for $42,500 (less than its prior sale price in 2000). However, the next lot (LOT 2192), the famous 1799 S-189 "Abbey Cent" was bid to $140,000.

Momentum remained strong throughout the draped bust cents (1796-1807). I was a bit surprised when the 1801 S218 cent (LOT 2221, an R5 variety with 3-errors rev.) failed to meet its reserve of $24,000. Personally, I liked this coin a lot! Another coin that really impressed me was the 1803 S-263 (LOT 2266). This coin is the finest known for the variety, although not uncirculated (EAC AU50). Apparently I was not the only lover for this cent, as it soared to $16,000 vs. "book value" of $5000. This lot illustrates how difficult it is to use "the book" to estimate the value of a really nice cent (particularly in this type of sale).

Before I close, I think I should commend Heritage for the excellent way they conducted this auction. Sam Foose (with help from Bob Merrill) called the sale with great professionalism and personality. The catalogue will become a valuable Large Cent reference, and is a collectible in its own right. The venue was perfect for the auction, and all systems worked very well (almost all the time). All in all, it was a memorable night!

Monday, February 11, 2008

The Goldberg's Pre-Long Beach Copper Sale

I just made it home from the Goldberg's auction of Early American Copper in Beverly Hills (Feb. 10, 2008) and I thought I would post some of the highlights while they are still fresh.
This sale did not offer much for colonial or half cent experts, but there were over 750 lots of Large Cents up for grabs.
Attendance was very good, with every seat in the large ballroom at the Crown Plaza taken when the 1st lot of the session was called. Many copper devotees came out, in addition to the "usual suspects". I suppose this happened because there are actually two large copper events in Southern Cal. this week - the Goldberg sale, and the Walt Husak sale (this Friday in Long Beach).
While the Husak collection features many condition-census pieces (the top 6 coins for any variety), the Goldberg auction was rich in scarce varieties, with most of the coins in low grades. The affordable nature of the material made it popular with both collectors & dealers, and bidding was active.
Some of the highlights (and surprises, for me) include:
+ A high-grade 1793 wreath cent with lettered edge (S-11C) discovered only last year in England was hammered for $42,500, which failed to meet the pre-sale estimate of 50,000-75,000.
+ A low-grade example of the famous Starred Reverse cent (1794 S-48) went to an absentee bidder for $16,500. Although the coin is dark & corroded, the "stars" are plainly visible.
+ A beautiful 1794 S-61 (PCGS AU55) was hammered for $17,000 (vs. a high estimate of $12,500), after a furious round of bidding.
+ A very rare 1794 NC-9 (the 2nd finest of just 4 known) was hammered to one of the "Boys of '94" for $32,000. He will now have something to show off at EAC'08!
+ A remarkable run of six 1799 cents in a row were sold, with the lowest grade coin (just FR2) bringing a wininng bid of $1400. 1799's are popular!
+ For middle-date enthusiasts, there was an EF45 example of 1817 N-7 (with full "mouse top") that was hammered for $2800 (vs. a high estimate of $1500). I loved this coin, but I dropped out long before the end!
+ The sale featured two key-date 1823's in VF (one N-1 and one N-2), and they both cracked the $1000 mark.
+ An 1822 N-6 in AU58, with a pedigree that includes both Floyd Starr and Herman Halpern brought a winning bid of $3100. It is a very nice cent!
+ The late-date cents (1840-1857) featured a number of coins that were pedigreed to the famous Robbie Brown. My personal favorite among these was LOT 1590 - an 1846 N-1 in MS-60+ with shimmering iridescent overtones. This cent received lots of bids from lots of us, but the winner got it for $825 (plus buyer's fee))! What an awesome cent!
All-in-all, It was a memorable sale, and a nice prelude to the sale of Walt's magnificent collection.

Wednesday, January 30, 2008

So, it begins...

Greetings, and welcome to my blog, dedicated to Early American Copper coinage.

I am new to web logging, but I hope I can produce content that will be fun for me to write, and interesting to the reader.

The current buzz among collectors of Early American Copper is about the sale of the Walt Husak collection of U.S. Large Cents.
  • Follow this link to the sale lot listing WALT_HUSAK_auction.

  • This event promises to be a HUGE numismatic event. You can bet that I am planning to attend!