Monday, June 29, 2009

EAC Grading

The subject of grading by EAC (Early American Copper) standards has been a recent topic among aficionados of these classic early American coins.

The 70-point grading system (widely used today) owes its existence to a founding member of Early American Coppers - Dr. William H. Sheldon. Dr. Sheldon was captivated by early U.S. large copper cents. He studied them extensively, and ultimately published the results of his research in a classic book called "Early American Cents", published in 1949. Later editions of this work were called "Penny Whimsy". In his book, Dr. Sheldon introduced the 70-point grading scale. On this scale, a coin can be graded anywhere between "1" on the low end (Basal State, recognizable as to coin type) and "70" on the high end (Flawless Mint-state, exactly as the coin left the coining press). The novel feature of this scale was that it could (at that time) be used to estimate a coin's value in dollars. A common cent variety dated 1794 with a grade of "12" would thereby have a value of about $12. Cents of higher rarity were assigned a higher Basal-state value (2 or 3, for example), and this factor was used to multiply the grade to arrive at the value for the scarce variety.

Grading by Sheldon's system became so popular that it was soon extended to all the other series of U.S. coinage. Other authors published grading guides that followed the 70-point scale. Most notable among these guides are the work of Brown & Dunn, and the American Numismatic Association (ANA) Grading Standards. The latter text is still widely available, and is considered a classic reference to grading for U.S. coins.

Time passed, and the Sheldon 70-point grading scale endured. During the late 1970's a period of high inflation was endured in the U.S. During this time, coin collectors began to develop a strong preference for coins that were graded on the high end of Sheldon's grading scale (60 and higher). This emphasis on high quality, and the growing awareness of the investment potential of rare coins, led to increasing price premiums for coins in the highest grades (65 and above). Collectors of early copper coins were largely oblivious to these market developments, since virtually all early copper falls into circulated grade categories (ie. grades below 60). However, silver dollars and other popular series experienced unprecedented demand in grades above MS60. Many coin dealers succumbed to the temptation to inflate the grade of coins in their stock by a point or two. At the height of the boom in 1980, a great deal of knowledge and effort was necessary to obtain an accurately graded (by A.N.A. grading standards) mint-state U.S. coin. The coin bubble eventually burst, and the subsequent market contraction was compounded by a concurrent tightening of grading standards. Many coin investors were disappointed, and a large number of people simply left the rare coin market.

The lesson from this debacle was not lost on the rare coin industry. In 1986 one of the industry leaders (a man named David Hall) formed a new grading service called the Professional Coin Grading Service (PCGS for short) with the goal of "solving the rare coin grading problem". PCGS maintained strict grading standards for U.S. coins, and introduced the concept of a sonically sealed clear plastic holder, which encased and protected the coin. A coin inside a PCGS holder received an endorsement that was on par with the "Good Housekeeping Seal"® for consumer products. Demand for PCGS-graded coins soon exploded. The results were predictable: First, prices rose rapidly for graded & encapsulated mint-state coins. Second, other grading services arose to compete with PCGS - most notable among these being Numismatic Guarantee Corp. (NGC) and ANACS (formerly the American Numismatic Assoc. Certification Service). The generic term "slabbed coins", or simply "slabs" came to describe the graded & encapsulated coins. In response to the widening price gap between successive mint-state grades, the grading scale for mint-state coins was further refined. Where numerical levels of MS60, MS63, and MS65 had once been sufficient, the full scale from 60-70, in 1-point increments was now utilized. Unfortunately, this innovation in the assignment of grades implied a precision in grading that was not really consistently achievable. The next rare coin market peak, fueled by strength in slabbed coins, occurred in 1989.

The economic recession in the United States in the early 1990's was accompanied by a crash in the certified rare coin market. There were definitely financial reasons for the market fall, but it was also a period of sobering up from the slab grading "party" of the 1980's. Perceptive people in the rare coin market began to observe that there were subtle but important differences in the grading standards from the various services. Furthermore, because coin grading continued to be more of an art than a science, individual coins might receive different grades from the same service on different days! This created uncertainty in the market (which was not generally desired by market makers). It also created opportunities for knowledgeable people with a "good eye" for slabbed coins with the potential to be cracked out of their existing holder and submitted for a possible higher grade. The "Crack-out" game was on! All of the grading services made adjustments, in an effort to create a stable & predictable rare coin market, and also to win market share. PCGS published a population report, showing how many coins of each denomination, type, date, and mint-mark they had graded in each grade category. This information greatly enhanced the amount of data available to rare coin buyers, and led to several adjustments in the marketplace, as the rarity (or lack of rarity) of each U.S. coin began to become known. The population reports have proven to be very a valuable resource for rare coin collectors and investors, enabling informed decisions to be made about coin acquisitions. A period of rationality began in the rare coin market, and this continues to the present.

EAC Grading
Early American Copper (EAC) grading also follows Sheldon's 70-point scale. The vast majority of copper large cents and half cents are circulated, and grading them involves understanding how much wear they have experienced. The generally recognized circulated grades include: FR2, AG3, G4, G6, VG8, VG10, F12, F15, VF20, VF25, VF30, VF35, EF40, EF45, AU50, AU55, and AU58. From the standpoint of wear alone, a strict adherence to ANACS grading standards for circulated grades will come very close to approximating EAC standards. There are many complicating factors, which are related to the peculiarities of the Large Cent and Half Cent series. These complications make grading the sharpness of early copper a little more difficult than most other coin series. For example, there are many die varieties of early copper with known weaknesses or die flaws in one or more places, which compromise the sharpness of the design. Another cause of weakness involves die failure, which results in early die-state coins having sharp features, while late-state coins appear weak, in spite of being well struck. For this reason, EAC grading involves both the understanding of what each grade on the numerical scale should look like (ideally) and the knowledge of each specific date & variety in the series, and how each of those varieties might deviate from the norm.

What really complicates EAC grading is the concept of "net grading". I will attempt to explain this concept, but I must be candid: EAC grading is an intellectual challenge, and mastery usually involves a lot more than reading & memorization. The most competent EAC graders have been looking at early copper for 10 years or more, and have evaluated many thousands of individual coins. Net grading involves determining the "sharpness grade" of the coin, and then deducting from this grade in order to account for any problems the coin might have. These problems are numerous, and they vary in severity. Problems include (but are not limited to): Cleaning (of a harmful nature), scratches, rim bumps, corrosion spots, porous surfaces, tooling (moving the metal on the coin with a tool), bends, holes, planchet flaws, and non-copper substances on the surface. If a coin has been subjected to only wear, and there are absolutely no problems beyond what is expected from circulation, then the net grade will equal the sharpness grade. The net grade reduction is a function of the number (and severity) of the problems, and the baseline sharpness grade. A lower grade coin (eg. VG) spent a lot more time in circulation, and therefore would be expected to have a lot of wear, and also a number of light ticks & scratches (so-called "circulation marks"). However, these circulation marks should have natural toning, and must not disturb the basic eye appeal of the coin. A higher grade coin (eg. EF or better) should have natural color and essentially flawless surfaces and rims in order for the net grade to be the same as the sharpness grade. A single hairline scratch on an EF coin could result in a 5-point deduction from the sharpness grade (if the scratch is fairly easy to see). On a VG coin, the same scratch would result in only a 1-point deduction. A deep scratch will result in a larger deduction to arrive at the net grade (about -10 points for an EF coin, and -3 points for a VG coin). Problems like rim bums and porous surfaces are treated in a similar manner for net grading purposes - if the problem is minor, the deduction is small (-5 points for EF, and -1 point for VG) and if the problem is severe, the deduction is doubled (at least). Coins with multiple problems receive multiple deductions. One can envision how a coin with excellent sharpness (EF details) can be net graded at only VG or lower! (for example "EF40 sharpness, scratched and having large areas of corrosion on both sides and two large rim bumps on the obverse, net VG10").

The factor that will dictate a particular coin's desirability within its grade designation is the eye appeal. EAC graders have developed a unique set of standards for eye appeal: these standards range from "scudzy" to "average" to "choice". Intermediate levels of "AVG-" and "AVG+" are often utilized to express eye appeal that is between the three basic levels. A coin that is called "average" meets all the criteria (eg. color, surfaces, number of marks, and overall eye appeal) for the designated sharpness grade. A "choice" coin has the eye appeal of a higher sharpness grade. A "scudzy" coin has one or more problems that cause its eye appeal to suffer.

EAC net grading is part science and part art. The old adage "Beauty is in the eye of the beholder" can certainly be applied. One person is likely to deduct more for cleaning than another person. The same can be said for any of the numerous problems that can afflict copper coins. For this reason, legitimate differences of opinion exist about the net grade of any particular coin. However, there is a general consensus among EAC experts about what differentiates a choice coin from an average coin, and there is also general agreement about coins that are scudzy. There is also almost no argument about what constitutes a problem - only how much the grade should be reduced from the sharpness grade to arrive at the net grade.

One advantage to the EAC net grading system is that it works for any genuine copper coin. The major grading services (notably PCGS & NGC) have often returned problem coins as "ungradeable". These two services now offer encapsulation for coins with problems, but a PCGS "Genuine" holder does not tell a potential buyer much about the coin (except that it is a real U.S. mint product). The EAC net grade is intended to indicate the market value of the coin.

A Net Grading Example
So, a natural question at this point would be: "How does one use EAC net grading, in a practical situation (such as trying to make a deal on a coin bourse floor) in order to decide what a coin is worth?". After all, the academic subject of grading can be debated forever, but ultimately coin collectors are interested in acquiring new coins for their collection at reasonable prices. I will describe the net grading process (the way I practice it), but I am not sure how well my words will express the experience. For readers who would like to explore the subject a little further, I suggest that you obtain a copy of Copper Quotes By Robinson (known as CQR within EAC), and read Jack's well-chosen words on this subject, found at the beginning of the book. The contents of CQR will also be extremely valuable as a guide to the value of early copper, by date and variety (and, of course, by grade).

Let us assume that you are standing at a coin dealer's table at a convention, and you spot an early copper coin in a holder that indicates only the date and a price.
  • You ask the dealer politely if you can take a closer look at the coin, and he hands you the coin.
  • Your first impression of the coin you are holding is very significant. Your reaction to the overall "look" of this coin can typically be described by one of the following words: "Wow!", "OK", "Yuk!", or "Hmm?". What do these reactions mean, and why are they so significant? Wow! - means you like the coin. OK - means there is nothing obviously wrong, and the coin could be worth consideration at the right price. Yuk! - means there is something wrong with coin, and you should strongly consider NOT trying to buy it. Hmm? - means there could be something wrong with this coin, but it is subtle. This is an important danger signal that you must not ignore - the coin just does not "look right" to you. Is it genuine? Have the surfaces been altered? You might want to seek professional advice before you proceed with your evaluation of the "Hmm?" coin. If your first reaction to the coin is either "Wow" or "OK", then you can move ahead (we will consider the "Yuk!" and the "Hmm?" coins soon).
  • Now, evaluate the sharpness grade of the coin (from 1 to 60). Take into consideration any knowledge you have about the specific die characteristics and normal wear patterns for this series, this date, and this variety. Now, you have a baseline (sharpness) grade.
  • Next, account for any problems that the coin may possess: Cleaning, rim bumps, scratches, etc. Use a magnifier, if this enables you to conduct a thorough technical evaluation. The key to this exercise is to remain objective about the coin. You do not own it (yet), and it is emotionally (and financially) much better to see a problem before price is negotiated than after the deal is made.
  • Determine the Net Grade for the coin. This will depend on the nature of the problem(s), and the sharpness grade. Minor problems will result in a small grade deduction for a mid-grade coin (about 3 to 5 points down, for a F12 to VF25) coin. For a high-grade coin (EF40 or higher), even minor problems can result in a large grade deduction (10 points or more). For a low-grade coin (G4 or VG8), minor problems typically cause only a tiny deduction (1 or 2 points). To-date, there are no expressly written rules for net grade deductions, and even experts will disagree about the net grade impact of certain types of defects. There should be some room for personal interpretation, based on your level of tolerance for certain problems (for example, I have trouble tolerating large rim bumps, but others seem to tolerate them. I have friends in EAC who hate dark color & corroded surfaces). Major problems always result in a lower net grade, and often the net grade will be less than half the sharpness grade (typical example: EF40 sharpness, but net VG10 due to heavy porosity and dark color). Actual experience with real copper coins and conversations with early copper experts provide the best opportunities for learning to net grade. Doug Bird and Steve Carr (both members of EAC) hold periodic EAC grading seminars - these are great fun, and valuable experiences.
  • At this point, you have a coin that you are interested in acquiring, and you have ascertained (to the best of your ability) its net grade. Now, using the net grade, you must determine the value of the coin. For this step, you will need either an encyclopedic knowledge of early copper, or the help of a price guide. I use a price guide. There are several of these available. The one that works best for me is Copper Quotes by Robinson (CQR). Other guides include the Coin Dealer Newsletter (known as the Greysheet by dealers), the Coin Market guide (published monthly in Numismatic News), and Penny Prices (available from Bill Noyes of EAC). PCGS maintains an on-line price guide - however, this guide is relevant only for coins that have been graded and encapsulated by PCGS, whose standards are not the same as EAC standards.
  • Remember the initial step, where you noted your first impression of the coin? Now, you can use this information to "adjust" the price you are willing to pay for this particular coin. Is the coin choice for the grade? If it is, then you should be prepared to pay a premium (often a substantial premium) above the price of an average coin. If the coin is average, then the value you have determined should be a good estimate. If this coin is a scarce variety, you may want to consider paying some premium for the "opportunity" to add this coin to your collection (only you can decide how long you would be willing to wait for another chance to own this variety, if you pass on this one). If the coin is below average, and it is a common variety, you should insist on a good deal - if the dealer says "no", you will get other opportunities to own the variety. If the coin is below average, but it is rare, you might still consider buying it, if the price is low enough.
  • Now, you need to compare the price that the dealer has on the coin with the value that you have just determined. If the coin is not priced, now is the time to ask the dealer how much it will cost. If the price is close to your estimated value, or below it, then you are on your way to a new acquisition for your collection. If the price is higher than your estimate of value, you must decide whether it is worth negotiating to a fair price, or whether you should pass on this one. If the coin is choice, or if the variety is scarce, you should be prepared to "stretch" a little in order to acquire it. The secret to success at this stage is keeping your emotions in check - the dealer is interested in making a sale, and your job is to make sure that if a deal is made, it happens at a fair price.
  • What about those "Yuk!" and "Hmm?" coins? Earlier, I suggested that you stop considering these coins immediately, and not proceed with the net grade evaluation or price determination. This remains pretty sound advice, but it might be a little harsh. If the particular variety you are considering is rare (R5 or higher), then you might want to consider buying a coin with problems. It all depends on the following: 1. Is the coin being priced fairly to account for the problems? 2. Can you live with the coin, even with the problem(s)? 3. How long is it likely to be before you get a chance to buy this variety in problem-free condition? Personally, I can tolerate a scarce variety with a problem (if the price is really good) until I can find one without a problem.