A Companion to Rare Coin Collecting
By Ray Wyman, Jr.

What is a "Rare Coin"?

Rare coins are unique items each carrying specific value. No two rare coins are absolutely identical. Each is treated as an individual piece. Coins can be appraised for value based on characteristics of the piece and its condition (wear, blemishes, purity). Value depends largely on the demand for the particular coin. Many serious collectors hire appraisers to assess a recognized standard, or grading, for their collections. The value of the coins is then certified, but the value stems not from the particular certificate but from what that certificate symbolizes.

Since value lies only in the actual item purchased, then the link to published price guides or "bid/ask" quotes is entirely dependent upon other items with similar characteristics and the demand for them. Remember that the importance of the quality of the particular coins you acquire can be overstated. You are not buying an index; you are buying tangible merchandise, which must stand on its own merits set by subjective set of appraisal rules. Herein lie many of the problems associated with coin collecting, but it makes for an interesting challenge of knowing when to hold a coin or when to sell it.

Fundamentals of Grading

Coins are classified by their state of preservation or condition. This is called grading. The value of the coin is entirely dependent on its grade. Unfortunately, the techniques used in grading rare coins are not very scientific, nor is it consistent. There is no subject more controversial subject than grading. While the debate dates back to the 1890's, it has been the last fifteen years that the problem has become acute.

The real problem stems from the high price differentials that exist between various grades. The premium for quality is greater today than ever. The highest grades, the so called "investment quality," have price differentials that can be tremendous. For example, in the December, 1986 issue of The Coin Dealer Newsletter, a Mint State (MS) 1880-S silver dollar graded at level 60 (or "MS-60") went for $39; grade MS-63, $80; MS-64, $225; and MS-65, an astounding $500. As you can see, the price of the choice uncirculated MS-65 coin sold for more than 12 times the MS-60, even though both are uncirculated.

Most of the debate stems from whether or not grading coins is an art or a science. To most collectors, it is a bit of both. With circulated coins, the grading of coins is a science. As a coin becomes worn from use, details of the design become obliterated. Precise standards have been agreed upon for the purpose of grading circulated coins. These grades define the amount of the design that must remain visible to meet that grade. It is from this highly regulated point of view that grading circulated coins has become a scientific observation.

The grading of uncirculated coins is far more subjective. Since an uncirculated coin shows no wear and all the details which were originally struck are visible, the grading question becomes one of judging visual impact and general attractiveness. A subjective element is introduced and process of grading becomes an art. As they say, "beauty in the eye of the beholder."

Take for example the fact that all coins, even when new, are not of equal quality. The quality of the blank, or planchet, the age and state of the die and the condition of the press all effect the appearance of the coin at the time it is minted. Furthermore, a great deal can happen to a coin after its minting without actually entering circulation. Handling at the mint and subsequent storage throughout the years all plays a part in its appearance today.

While guidelines exist for determining the degree of luster, strike, color and marks effecting grade, the final judgement is subject to individual preferences. The number of possible combinations is infinite and each buyer inserts his or her own criteria in the process. It's no small wonder that experts often disagree about the grade of individual uncirculated coins.

But, does this mean that buying uncirculated coins is a random and unstructured process? No, but be wary of any claim that a coin has been graded by a universally accepted or "official" grading process. In most cases, the coin you buy has been assigned a grade that, in the opinion of the seller, best describes the coin.

To illustrate, if a group of 70 uncirculated silver dollars were given to a knowledgeable numismatist he would sort them into any number of stacks of ascending quality. It is possible that you could wind up with a line of 70 coins, ranking them from best to worst, in the opinion of the numismatist. In this case, each coin would probably be worth slightly more than the coin next to it. In reality, this is how coins are traded among the experts.

Unfortunately, this structure does not lend itself easily to an organized trading system to base an industry such as the coin market. Efforts have been made to provide some type of mass communication so that a coin could be offered sight unseen to a prospective purchaser. Some experienced dealers, who had the opportunity to examine thousands of coins, began to formulate their own unique mental image of a superior, average, or inferior specimen.

Subsequently, adjectives were placed before the uncirculated grade to indicate its rank relative to others known. These included choice, gem, brilliant, select and a host of others.

Around the mid-1970s, many collectors adopted a scale created by Dr. William Sheldon. The Sheldon numerical system, based upon a scale of 1 to 70, set aside certain groups to describe the condition of a coin. The numbers 60 through 70 were set aside for uncirculated or mint state coins. The intermediate numbers, 61 through 69, are loosely defined plateaus where coins of a similar general quality may be grouped.

However, the illusion of precision stemming from the numerical system has created some confusion. The valuation/grading of a specific coin by a numerical assignment often remains a subjective judgment open to interpretation.

Time and Grading

In the past, the relationship between value and grading has been dynamic, influenced by the conditions and timing of the market. Since we are dealing with perceptions, the psychological effects of a given market, "bull" or "bear," will greatly effect the actual "scale" used to assess value.

In a "bull" market, the grading standards seemed more relaxed. With a liberal shift in standards, the reaction was to increase values. A buyer's willingness to "stretch a bit" offered the appearance of a lower standard for a given grade. In a "bear" market, when cash was tighter and buyers are generally more particular, risk was reduced and the pieces of marginal quality are rejected giving the appearance of a stricter, or tougher standard.

Since the early 1980s, the trend was toward a more conservative approach to grading. The explosive bull market of 1980 saw many pieces trade at MS-65 values that today would be traded in the MS-63 range. The drift in grading standards was an evolutionary process that, viewed over an extended time frame, could be measured and analyzed. Due to the complexity and the nature of the forces at work, attempting to find a singular cause for "gradeflation" was futile. However, plotting a trend in the process was quite possible.

Another factor in grading has been the "value based" grading standard used through 1985. Prior to 1986, there were no consistent interpretations of grading standards for coins. Guidelines existed, but they were vague and subject to wide interpretation. The mention of "a few minor marks" said nothing about the size and location of the blemish on the coin. Then, grading standards emerged from the prices listed in the wholesale newsletters and a coin's "worth," its listed price, was classified at a corresponding grade.

The weakness of a grading system based on value was the susceptibility to manipulation and promotion. Since the bidder for a particular item had absolute authority to accept or reject material sent for purchase at his or her listed bids, it was possible to raise "bid" levels to whatever level was desired and purchase only the material the bidder wished. Sometimes, that amounted to virtually nothing.

To complicate matters, the chief reporting mechanism, The Coin Dealer Newsletter, listed these increasing bids but, due to the size and nature of the market, was unable to monitor the appearance of most of the rejected items or even determine whether transactions were taking place at all.

In the absence of independent monitoring, the determination of value, via the listed "bids", was left totally in the hands of dealers, many of whom had a vested interest in seeing that these prices doubled or even tripled in a relatively sh