A Companion to Rare Coin Collecting
By Ray Wyman, Jr.
Since the late 1970s, the issue of grading has dominated numismatics. This is mainly due to the significant premiums that have accrued in so-called "high-end" coins, those graded MS-63 and above. The resulting sensitivity between grade and value has given rise to a number of independent "third party" grading services that, for a fee, will examine coins and issue a certificate expressing their opinion as to the grade.
At present, there are three major services engaged in the certification of coins. The wholesale "bid" prices for coins certified by these three services are reported in the weekly Certified Coin Dealer Newsletter. The following sections deal with each service and their respective strengths and weaknesses.
The American Numismatic Association Certification Service (ANACS)
The first on the scene in 1974, the American Numismatic Association Certification Service (ANACS) began by issuing certificates for authenticity only. Five years later, they started assigning numerical grades to all qualities of coin. As an arbitrator of authenticity, ANACS remains unmatched in its ability and enjoys widespread respect from the industry. Their approach to grading is another matter however, and it is in this area that they often find themselves at variance with the commercial sector of numismatics.
To begin with, ANACS' grading system operates from a premise that all coins are MS-70 quality immediately after striking. This means that only those blemishes and marks that are a result of mishandling after the dies have parted act to lower the grade of the coin. Known as the "technical" interpretation of grading, a persuasive argument could be made to support it however the realities of the market dictate otherwise.
A long-standing debate argues the fundamental purpose of grading; whether it is merely a descriptive tool to communicate the amount of damage incurred after striking, or a ranking system to determine value. Despite the theoretical appeal of the first argument, it fails to address the practical use of grading as employed in the marketplace.
Another deficiency of the technical system is that it often produces widely inconsistent grades. For example, given two coins, identical except for strike, the more sharply struck piece will enjoy higher demand and will consequently command a higher price. But a sharply struck coin with a technical grade of MS-63 or MS- 64 could be valued higher than a weakly struck coin of the same date and mint which might merit a technical grade of MS-65.
But the greatest problem for ANACS is with its credibility among collectors. While the organization has explicitly denied any connection between their assigned grade and the market value of an item, they have proven vulnerable to the reinterpretation of grading standards brought about by substantial increases in the published "bid" prices. Although the cases brought to light a few years ago were only anecdotal, enough evidence was presented to show that several times since 1980 ANACS has tightened their grading criteria to "keep in line" with the market. This apparent conflict with their policy of detachment from commercial interests has made their grading system somewhat untenable among some serious collectors.
Another problem that was brought up is the question of staff competence. ANACS is operated by the American Numismatic Association, a non-profit organization, and lacks the funding to offer salaries competitive with what a skilled grader could earn on the open market. This results in a high turnover of experienced graders and a general lack of market or trading experience among the newly hired.
Despite the handicaps, ANACS enjoys considerable respect with the public at large. They are unquestionably the most "independent" of the three major services, having no ties whatsoever to any commercial interest. They have a long track record as well, with high visibility to the 25,000+ members of ANA. As a result, the demand (and prices) for coins with ANACS certificates remain relatively high.
Numismatic Certification Institute (NCI)
The second of the three major services is the Numismatic Certification Institute (NCI), an affiliate of Heritage Capital Corporation. Founded in 1984, NCI espouses the grading philosophy of Jim Halperin, set forth in The NCI Grading Guide. It can be characterized as more commercial than that of ANACS, incorporating all factors which the market considers when trading coins, including strike, luster, surface preservation (bagmarks and hairlines) and overall eye appeal (toning). On balance, grades assigned by NCI is usually at the high end of the range of reasonably likely grades.
NCI is regarded as a very consistent service; two professional coin appraisers grade every coin. Yet, the prices for NCI certified coins reported in the Certified Coin Dealer Newsletter generally run less (sometimes substantially less) than prices for the two other certification services. This is attributable to several factors. First, is the "high end of the range" grading mentioned earlier, which places many NCI coins on the liberal side when viewed by some other dealers. In the 1879 dollar example referred to above, over three-quarters of the dealers examining the coin would have graded it only MS-63 or MS-64, rather than MS-65. Second, is the nature of the prices reported by the Certified Coin Dealer Newsletter They are intended to be "sight-unseen" bids, or the price of a "low-end" example for a given grade.
The actual trading range for NCI coins is quite wide, and given the opportunity to examine the coins prior to purchase, many dealers will pay prices well in excess of those listed on the Certified Coin Dealer Newsletter. Occasionally, NCI coins may even bring prices commensurate with those of ANACS or PCGS. This is the exception rather than the rule, however, and collectors purchasing average quality NCI coins should usually expect to pay considerably less than they would for a similarly graded PCGS or recently graded ANACS coin.
Professional Coin Grading Service (PCGS)
The newest of the three major services, the Professional Coin Grading Service (PCGS), is also the most unique. PCGS began operations in January 1986, and in their first year graded nearly twice the number of coins as their next two competitors combined. PCGS is really not a grading service at all. It could more accurately be termed a valuation service, since a key aspect of their product is the establishment of a sight-unseen cash market for their certified coins, with guaranteed liquidity at the published bid prices of the participating dealers.
PCGS seals each coin they grade in a permanent hard plastic case (known in the industry as a "slab.") Since the coin cannot be removed without destroying the case, and since these cases are inert (non-interactive with the surface of the coin), sight-unseen coin trading becomes feasible as the coin's appearance should not change once it has been sealed. PCGS will not grade a coin if it has been damaged, if it contains traces of PVC, or would otherwise be considered a "problem" coin by some dealers who might have to purchase it sight-unseen.
Another fundamental tenet of PCGS is the one grade/one price philosophy. It asserts that all coins of a given grade are basically worth the same price. This assumption upsets the basis of the wholesale marketplace, and many independent dealers. There is clearly a far greater difference both in appearance and value between the best MS-64 1881-S Dollar and the worst MS-64 '81-S Dollar, than between the best MS-64 and the worst MS-65 '81-S Dollar. The unbroken continuum of condition into which coins fall affirms this fact. However, the market value in the PCGS system of the first pair of coins mentioned is identical, while that of the second pair differs by over 100%.
While this situation offends the sensibilities of many old-line wholesalers, for the uninformed investor it is nothing short of a panacea. The coin has become an object that can be purchased and, more importantly, liquidated at a constant grade at or near a published "bid" price. No questions asked. The adjustment of grading standards to meet published bid prices has been rendered impossible. Bid prices for a given coin must now adjust to the supply and demand characteristics of PCGS coins at a given grade. The impact of this constant grading standard will greatly alter both the movement and reporting of prices across the industry.
There are numerous other grading services of varying size and repute. None approach the "big three" in volume and organizational strength so the market for coins certified by one of these organizations is very high. Among the more notable of the smaller services are the International Numismatic Society (INS) in Washington, D.C., the Rare Coin Exchange in Chicago and the Numismatic Guaranty Corporation (NGC).
A Note About Certified Coins
Now that we've established the subjective nature of coin grading, consider how these coins, once certified, can effect the composition of the coin market. Wholesale purchases of coins is often a risky venture especially when dealers disagree with the certification. Naturally, dealers who send coins to be certified will only resell those coins as certified coins if the grade meets or exceeds the grade they assessed when they purchased it.
For example, a bag of 1880 silver dollars is auctioned off and graded raw (uncertified) by 20 dealers. Ten thought they were MS-63 grade and 10 thought they rated MS-64. Let's assume that the coins were then purchased by one of the dealers who felt they were MS-64. The dealer then sends them to one of the major certification services and they come back graded as only an MS-63. Now, it would make little sense for the dealer to attempt to sell these coins as certified, since the dealer paid a higher price for the coins than he or she could hope to receive for them as MS-63. The dealer will therefore uncertify them by breaking the PCGS case or destroying the grading certificate and either resubmit the coins, hoping to receive the higher grade, or sell them raw to another dealer who agrees with the MS-64 grade. In either event, the coins will not be sold as MS-63 certified coins.
Since they were borderline coins, high-end 63 or low-end 64, the dealer is justified in hoping for the higher grade upon resubmission. The inconsistencies in the grading process and the personal preferences held by different graders working for the same service will often result in different grades, especially such borderline cases as this. The result is that the high end, or premium quality coins, of a particular grade range are less likely to remain "certified" than are the average or lower quality coins in the same grade range. Therefore, the quality of most certified coins on the market is likely to be in the middle or lower end of a particular grade range.