March 25, 2011
Virtually every coin that you buy as an investment, and probably every coin that you seriously collect, has something in common: you have probably graded it. You may have called it “uncirculated” or found an adjective to describe the quality in better terms; you may have assigned it a number that is intended to be descriptive of its relative quality compared to other coins, or you simply may have determined that it is better than a previous specimen.
What exactly is grading?
Grading is an attempt to quantify, and describe, the various states of preservation (or condition) that a coin is in. It is not uniform; whether numerical descriptions or their adjectival counterparts are utilized, they differ from person to person, dealer to dealer, buyer to buyer, and from seller to seller. Generally speaking, the better the condition of a coin, the more it is worth. A coin may be in poor condition and still be quite valuable; but if the “poor” condition coin is instead in “fine” condition, it will be worth more than its lesser-graded counterpart.
Most of the coins purchased by you for investment will be uncirculated coins, yet widely respected commentators still do not agree on how to describe differing types of uncirculated coins. In Dr. Richard Doty’s The MacMillan Encyclopedic Dictionary of Numismatics (1982), he refers to “MS-65s, sometimes called ‘choice uncirculateds,’... [which] will command much higher prices than MS-60s ...”
In Penny Whimsy, (1958) Dr. Sheldon (who invented the numerical grading scale) said, “The MS-65 is a coin that would be a perfect MS-70 except for some small minor blemish. It may lack full mint luster, or some microscopic or almost negligible blemish may be demonstrable. There may be a spot of discoloration, a fingermark or a barely discernible nick.”
I have surveyed and read dozens of books that deal with grading in both practical and abstract terms.
Grading differences are perhaps best summed up by Q. David Bowers, a former president of the ANA and also the Professional Numismatists Guild, in his book Adventures with Rare Coins (1979):
“Often five different sellers will assign five different grades to the same coin, perhaps differing just slightly but still differing, often with important financial consequences ... ss the evaluation of the grade or condition of a coin is a largely subjective matter, experts can legitimately differ.”
How is it that coin grade descriptions, and hence opinions, can differ?
Grading, is inherently subjective and represents one person’s view as to its state of preservation, and, if uncirculated, the degree or extent of pleasure (eye appeal) that it beholds to the purveyor.
The principal problem with numerical grading, of course, is that it gives the impression of exactitude and precision and it is, in the final analysis, little more than a subjective view of the cataloger.
Grading is an art and not an exact science. More precisely, grading is a matter of opinion. Differences of opinion may occur among graders as to a particular coin, and any grader could conceivably change his interpretation of the grading standards over the years.
When the ANA Official Grading Standards for United States Coins book was published in 1978, it represented a new grading system, previously untried.
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The grading standards as enumerated in the book were and are not precise, with the descriptions lending themselves to different interpretations. The marketplace composed of collectors and dealers has tightened its interpretation in recent years.
Even with the creation of commercial grading services that utilize a “sight unseen” market for purposes of buying, and selling, grading (and pricing) has not standardized. A coin graded MS-65 by ANACS is not necessarily the same price as a coin graded by PCGS (the Professional Coin Grading Service), and a PCGS-graded coin may not be the same price as one graded by the Numismatic Certification Institute (NCI) or Numismatic Guaranty Corporation (NGC).
Grading of rare coins, even with professional services doing the bulk of the work on expensive, hard-to-grade items, still hasn’t solved the issue that the description of a coin remains more of an art than it is a science. (To the extent that 1 to 70 is inadequate to describe a coin, 1 to 100 offers more territory but no more precision).
Excellent text books such as a Jim Halperin’s NCI Grading Guide, and the Official PCGS Grading Guide edited so well by Scott Travers, go a long way toward making the process scientific and actually can teach reliable techniques that collectors, investors and dealers can consistently use.
Respected numismatist, Steve Ivy, conducted a hands-on survey whose purpose was to hire a professional numismatist for his company, Heritage Auctions. World class graders examined a series of coins and placed grades on them.
At issue was their ability to grade to the marketplace. The prize was a job with Heritage, one of the world’s largest, and fastest growing coin companies. Across the board there were significant variations of one point, two points or even more on the MS-60 to MS-70 uncirculated grading scale. The world class graders who applied could not agree on a majority of the grades.
A major Court case was decided Jan. 27, 1998, in a ruling by the U.S. Tax Court in Washington on the estate of Ed Trompeter, a well-known collector of proof gold coinage and other rarities.
Trompeter’s estate became embroiled in a claim of tax fraud because of allegations that the gold coin collection, part of which was sold by Superior, was deliberately undervalued. A $14.8 million fraud penalty assessed by the IRS was the subject of the dispute.
The court’s decision recites that over 180 coins were submitted to PCGS for grading. The conclusion: 69 were Proof-63, 78 were Proof-64 and 12 were Proof-65. (There was just one found to be Proof-66, one Proof-67 and one Proof-69).
Trompeter’s gold was then shipped to Numismatic Guaranty Corporation, whose experts had a different view of part of the collection. They agreed that there was one Proof-69, but after that they parted company.
NGC’s found five Proof-67, 22 that graded Proof-66, 51 that graded Proof-65, 71 that graded Proof-64, and only 21 that graded proof-63. In contrast to the 15 pieces PCGS found to be 65 or better, NGC ruled 78 to be in that state of preservation.
Tax Court Decision in Trompeter Estate
This is not the end of it, however, for the Tax Court had to decide who was right in the grade. Other experts were provided compliments of both sides in the litigation – the IRS and the Trompeter Estate.
In the final analysis, the court rejected all of the experts save one: the decedent himself, Ed Trompeter, who had placed a value on the coins that Superior sold at auction before his death. Their reasoning: he had predicted within 2 percent the selling prices received at auction.
The standards set out in the ANA guide and its successors are quite vague and leave a great deal of room for interpretation. For example, an MS-65 will have “fewer bag marks than usual,” but there is no definition of what is “usual.” An MS-60 will have “a moderate number of bag marks.” An MS-63 will be somewhere in between. What coin will fit within each level will vary from series to series, from design to design, and, most importantly for the consequences in the marketplace, from grader to grader.
In a case brought by the Federal Trade Commission alleging grading and pricing violations, the Court tried to explain the difference in various grading systems.
“¶19. The value of a rare coin depends on its condition. In evaluating a coin’s condition or “grade,” a number of factors are considered, including: (1) the coin’s overall appearance and eye appeal; (2) the number of marks and scratches it has; (3) its toning, color, and tarnish; and (4) its “strike” or the clarity of the impression made in the minting process. Different grading systems and individual graders may weight these factors differently in grading coins. Thus, for example, some graders may be more strict about overall eye appeal, while others give more emphasis to the amount of rubbing and bag marks.
In the 5th edition of the ANA Grading Guide, Q. David Bowers writes in the introduction:
“[i]t is not the slight differences which concern us here; it is serious or major differences. Unfortunately, it is not easy to define what major differences are. The problem is that grading is a matter of opinion, and experts may differ. I cite several examples:
“(1) I have in my office a silver dollar sent to a leading grading service on three different occasions, and it came back with three different grades.
“(2) Barry J. Cutler, formerly of the Federal Trade Commission, told a symposium at the ANA convention in Seattle, August 1990, that he had conducted a blind test of grading accuracy. Although professional graders had claimed before hand that they were so accurate that they could consistently tell the difference between a coin graded MS-63 and one graded “MS-63 plus” (or very slightly better than MS-63; plus marks are not part of the ANA grading system), in a test conducted by Mr. Cutler, expert opinions for the same specimen of a Saint-Gaudens $20 gold piece ranged from AU-58 to MS-64.
“(3) In 1990, I sent an uncirculated 1893-S Morgan dollar, one of the most highly prized varieties in the series, to a leading grading service where it was graded as MS-63. I then sent it to another leading service where it was graded MS-65. At the time the market difference between the MS-63 and MS-65 grade was approximately $100,000!”
Bowers concludes that “most experts can agree with a point or two in the Uncirculated range,” but goes on to state that when it is claimed that “a difference of two points, three points or some other difference... indicated overgrading,... the situation is not that simple.”
To understand the numerical grading system, it helps to visualize a 12-inch ruler, with the numbers running from left to right. Generically, “good” is at the left end, perhaps at the 1-inch mark, and refers to well-worn coins of the type that had served as pocket change for a substantial period of time. The “fine” coin is in the middle, perhaps at the 6-inch mark; its design elements are all quite clear, but it, too, has been in circulation. The typical so-called uncirculated coin falls at the 10-inch mark and still has its mint sheen, without a lot of contact marks on its surface.
From 10 to 12 inches on the ruler are the other, “better” grades of uncirculated coins.
In 1958, a book entitled A Guide to the Grading of United States Coins, by Martin R. Brown and John W. Dunn, revolutionized the field of coin grading. For the first time, it systematized in comprehensive fashion the description of all circulated coins. Another important book on the subject of coin grading was Photograde, by James F. Ruddy, which was published in 1970. This book marked the first commercial attempt to systematically photograph each type of coin in all of its varying circulating grades. It also demonstrated that photographs could reveal the differences among coins in various states of grading preservation.
Creation of the American Numismatic Authentication Trust (ANAT), later ANACS (originally the American Numismatic Association Certification Service), was another milestone. This trust was formed by the American Numismatic Association for the purpose of, among other things, funding the writing and publication of a major treatise covering circulated and uncirculated coins. The resulting volume, entitled Official A.N.A. Grading Standards for United States Coins, is now in its sixth revised edition (2005) and is notable for the fact that its grading criteria are systematically and explicitly listed in a form that can be utilized by others for both circulated and uncirculated conditions.
There are other grading guides, too (see bibliography) but in terms of significance, the issuance in 1997 of the Official Guide to Coin Grading and Counterfeit Detection,a Professional Coin Grading Service publication edited by Scott A. Travers, is a major milestone since it systematically describes coin grading in circulated and uncirculated states of preservation, by series, and explains how a third party grading service functions.
Given the number of organizations that perform grading, it is presently impossible to speak of a “market standard” or of any single standard within the coin industry. A fact of life for investors, coin collectors and buyers is simply that, even today, there are numerous and often inconsistent standards for grading coins. Likewise, there is a broad range of pricing in the rare coin field that can and does differ for identically described coins--even for coins advertised several pages apart in the same periodical.
Here is a non-exclusive list of major coin grading services in 2010 along with their Web sites:
American Coin Club Grading Service
Beverly Hills, CA
ASA Accugrade, Inc
ANACS Certification Service, Inc
Dominion Grading Service
Virginia Beach, VA
Hallmark Coin Grading Services
Vancouver, BC, Canada
Independent Coin Grading Company
National Coin Grading Service
Numismatic Guaranty Corporation
Boca Raton, FL
Professional Coin Grading Service
Newport Beach, CA
Sovereign Entities Grading Service
Star Grading Services
Coins may be graded using either adjectives, a numerical description, or some combination of the two, and as Dr. Richard Doty notes, “along with rarity and demand, they establish the buying and selling prices for coins, tokens, paper money, etc.”
Unlike many other objects d’art, the condition or state of preservation of a coin cannot be improved. Metal cannot be added to or “repaired”. It can, of course, worsen with time, which is to say that it can deteriorate, or its grade can worsen.
It can never, however, get better. Despite this, the subjectivity of grading can allow for differing interpretations as to the grade or condition of a coin – so much so that a coin’s description can appear to “improve” its grade from one owner to the next.
For many years, an adjectival description was utilized based on the following scale: poor condition, fair condition, good condition, very good condition, fine condition, very fine condition, extremely fine condition, about uncirculated condition, and uncirculated condition. Poor condition is the least impressive state of preservation, and can commonly be referred to as a worn coin, not unlike the buffalo nickels, dateless with little facial or other detail which frequently appeared in pocket change two decades ago. Uncirculated is the best condition, though it is not fully descriptive of what the term actually means.
Technically, the coin cannot be said to be “without any circulation” at all, since it is the act of placing the coin in circulation which removes it from the Mint.
Rather, uncirculated is said to refer to an absence of wear on the metal surface of the coin, and to mean that the coin has not been in general circulation.
Precisely how a coin is described to refer to its grade is the subject of considerable discussion, and debate, though there is less debate over whether a coin is “uncirculated” or “circulated” than with degrees in those various categories.
What, though, about the uncirculated grade and with coins like silver dollars, or others? Grading, there, is subject to considerable discussion as to how each of these series are to be described. Even seemingly identical numerical descriptions and their adjectival counterparts differ from person to person, dealer to dealer, buyer to buyer, and seller to seller. It differs among experts, and amateurs, experienced and inexperienced collectors. Most disputes and litigation center on grades of MS-63 and above and whether a coin sold as MS-65 is that grade or an MS-64, or lower.
One thing that probably will become apparent: when it comes time to invest in coins, whether for your rare coin retirement or for other purposes, the better the condition you can acquire, the greater the anticipated return is likely to be.
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On January 10, 2013 LangleyJeanine23
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