Buying the Jump Grade

A few recent  coin sales that were made by my firm have given me an idea for a blog that I think is interesting. I've written about this before so I'll try to approach what I think is an important concept from a new perspective. The concept of value is extremely important to me when I buy a coin for my inventory and I try and share this with clients of DWN. In a nutshell, my core belief in coin buying is that, with most coins, there is a point at which you can "overbuy" . There are obvious examples of this and not so obvious ones.

The basis of my concept is what I refer to as the "jump" grade for a coin. The jump grade is the point at which the value spread for a coin becomes out of whack and the higher grade(s) for a coin no longer make sense.

 Let's look at a hypothetical pricing structure for a coin in higher grades:

     MS63:  $2500

     MS64:  $5000

     MS65:  $90000

This seems far-fetched, right? In truth, this is the exact value spread chart for a 1920 St. Gaudens double eagle, an issue that I consider to be the poster child for buying the jump grade which is MS64.

In this case, an MS64 example at $5,000 seems to make alot more sense than an MS65 at $90,000, especially given the fact that the single PCGS MS65 1920 Saint that has ever been graded isn't all that much nicer than a number of the 64's that I've seen or sold. So why would anyone buy a $90,000 version of a coin that can be represented in a set by a nice $5,000 version?

The answer is more complicated than you think. Obviously, part of it is vanity. Very high end collectors demand the finest coins and if a finest known coin jumps nearly 20x in value over the next grade down, that's just the reality of the market. If you are putting together a set of Saints that is competing for the finest in the set registry, the opportunity to add a finest known population one/none better coin (and the huge number of "points" that come with such a coin) is far and few between.

But what about the rest of us; we coin buyers without unlimited funds?

I'd like to share a few of my personal philosophies about value in numismatics.

     1.  Most collectors overbuy common coins and underbuy key coins. This is especially true for gold collectors who focus on 20th century issues. Let me give you an example. If you are collecting high grade Indian Head half eagles by date, why spend $25,000-30,000 on a common date in MS66 when you can buy a perfectly acceptable MS65 for half that amount? I think I'd rather pocket the $12,500-15,000 difference and apply it to a truly rare coin like a 1911-D. Conversely, the same collector who is working on the killer set of Indian half eagles would be foolish to scrimp on a classic issue like a 1929 and buy a "details grade" cleaned example so he could save money.

     2.  Issues with large underlying populations are dangerous purchases. Let me give you an example, along with a chart:

     1879-S Double Eagle

     Grade          PCGS Population          Value Range

     MS61                        225                        4000-5000+

     MS62                         59                          11000-13000+

     MS63                           3                           40000++

This issue actually has not one but two jump grades. For many collectors, the choice will be clear: buy an MS61 because in MS62 the price of this issue jumps almost threefold. An important point to consider is how many of the 225 coins graded MS61 (the actual number factoring in resubmissions is probably still 125-150) could become MS62 someday? Even if the number is just 10-20% percent of the total, that's still potentially as many as 15-30 new MS62 coins. Is the market deep enough to handle that high an influx and still maintain current value levels?

But for collectors with deeper pockets, MS62 is the jump grade for this issue, especially given the fact that they are unlkely to have the chance to buy an MS63 ( considering that the PCGS population is just three  and none have traded at auction since 2006). My personal choice would be a nice MS61 but I would buy a high end MS62 at, say, $15,000 if it were an obvious "just miss" coin.

3.  "Boring" coins deserve "boring" grades in most sets.  To me, a coin like a Dahlonega quarter eagle is interesting. That's why I don't think you can really "overbuy" in this series. There are very, very few D mint quarter eagles graded MS65 (or even MS64) and just about any coin graded as such, unless its horribly overgraded, is worthy of consideration for an advanced Dahlonega specialist.

But a coin like an 1898-S half eagle is boring. There were nearly 1.4 million struck, thousands and thousands exist and most range from nice to very nice. I have a hard time getting excited about a nice 1898-S half eagle; even the direct-from-the-mint to-John Clapp piece, now graded MS68 by PCGS. This coin last sold for $81,600 and I can think of alot of U.S. gold coins at this price point that I'd rather own. The only real "function" that this MS68 example might properly serve is as a type representative in a knock-your-socks off set.

4.  Type collecting looks at jump grades differently than date collecting.  Type collectors just buy one example of a specific design unlike date collectors who buy numerous. So a type collector will look at a jump grade differently. Going back to our earlier example of the Indian Head half eagle, for type purposes an MS66 might make sense and this becomes the jump grade; given that the next grade up (MS67) is likely to cost $70,000 or more.

5. You can throw the book away when it comes to dual rarities.  There are coins that are rare because of their grade and there are coins that are rare because few are known. Then there is the "rarest of the rare." These are coins that I refer to as "dual rarities" because they check boxes on both sides. An example of a dual rarity is a coin like the Byron Reed 1864 quarter eagle, which is graded MS67 by NGC. This is a coin that is not only very rare in any grade, it is an amazing piece from a condition and appearance standpoint.

I'm going to write an article on dual rarities and it should appear in the next few days on my website www.raregoldcoins.com.

Whether you have a coin budget of $1,000 or $1,000,000, you want to get the best value you can every time you make a purchase. Understanding the concept of the jump grade can help you as you mull decisions for your collection.

How Do You Price Really Special Coins?

In the recent Schuyler Rumsey coin auction, there were a number of coins that I would define as "really special." After the sale was over, I thought about the prices they brought and was initially pretty stunned. Upon further reflection, I still think that these coins brought strong prices but the numbers now make a little more sense . Let's take a look at some of these specific coins and then ask (and answer) a bigger question: how do you price a really special coin? This was not a condition-related sale and there were only a few coins that brought a tremendous amount of money because they were high grade for the issue. Examples of such coins include the 1852-O eagle in PCGS AU55 (Lot 982) that brought $18,400 and the 1870-CC eagle in PCGS EF45 (Lot 1030) that sold for $97,750. In both cases these coins sold to savvy dealers who clearly believed that the coins would upgrade significantly. If they don't upgrade, both coins will prove to be bad deals for their buyers.

But the coins that were of real interest to me in the sale were the still-slightly-under-the-radar rarities like the 1864-S eagle, the 1873 eagle and the 1876 eagle. These aren't coins that condition is solely relevant. They are what I call "fundamental rarities" or coins that are rare in all grades.

In the Liberty Head eagle series, the 1864-S, 1873 and 1876 are three of the rarest collectable issues. In fact, the only eagle that is rarer is the 1875 which is, for all intents and purposes, nearly impossible to find.

The 1864-S eagle in the Rumsey sale (Lot 1017) was graded VF30 by PCGS. It was a coin that I thought was accurately graded and, in spite of a scratch on the reverse, it was evenly worn and rather handsome for the grade. This coin sold for $34,500; by far a record price for the date in this grade. I know the buyer of this coin; he is a very sophisticated collector. The underbidder was a knowledgeable dealer. Were these two individuals crazy or were they savvy?

Before we can accurately answer that question, some background information about the 1864-S is in order. And after this, we need to look at ways in which really special coins (which any 1864-S eagle is) are priced.

The 1864-S is the second rarest Liberty Head eagle after the 1875. There are probably no more than 20-25 known to exist. In my experience, the opportunity to purchase one occurs maybe once every three to five years. This is verified by the fact that only one piece (Bowers and Merena 7/06: 1640, PCGS EF45 at $50,600) had sold in the last five years. To find a piece that was comparable to Rumsey:1017 you had to go all the way back to the Richmond I: 2074 example (graded EF40 by NGC and selling for $10,350 but a coin which, as I recall, was really no better than the PCGS VF30 being offered).

Using comparable auction prices to help determine the price of a rare coin has become commonplace in the last few years. In the case of the 1864-S, this was not a good method for at least two of the following reasons:

The number of auction records for VF30 1864-S eagles is virtually nonexistent. The last coin sold at auction as "VF30" was a raw, cleaned example in July 1997 that brought $8.050. Clearly, this is of no help.

Since the Richmond I: 2074 coin was sold back in 2004, the market for this issue has totally changed. This is proven by the $50,600 that an EF45 brought just two years later. But that was six years ago and, if anything, the number of collectors who want an 1864-S eagle in any grade has at least doubled--if not tripled.

Since we can safely state that using auction comparables to price an 1864-S eagle isn't going to work, then how about checking a published price guide like Coin World Trends? According to the most recent edition, values for the 1864-S eagle are $5,500 in VF20 and $12,500. These were probably accurate in 1992 but in 2012 they are clearly completely and utterly irrelevant in 2012 (but that's another story...)

Before I render my verdict on whether the 1864-S in the Rumsey sale was a good deal or a bad deal, I think there are two other points to touch on.

The first is opportunity cost. If you are a deep-pocketed collector and you are particpating in a challenging series with a number of really special issues included (Liberty Head eagles are a poster child for this) you always have to determine how often will you have the chance to buy an acceptable example. In the case of the 1864-S, it's been pretty well established that its going to be once every three to five years if you are lucky. So the chance to buy a decent one represents an exceptionally important opportunity for the serious collector.

Second is the fact that any really special coin is part of what I refer to as a transaction-driven market. What I mean by this is that when you buy an 1864-S eagle in PCGS VF30 for $34,500 you have essentially created a new market. Yes, this market is considerably higher than it was the last time that one traded. But the reality of the market is that since a VF30 just traded for $34,000 in a public transaction, all the geniuises that live by comparable auction prices realized are now going to see this $34,000 trade. Even if Trends ignores this transaction and keeps their estimated value at 1992 levels, the bar has still been raised.

Let's take a less involved look at the other two really rare date eagles that I mentioned above.

The 1873 eagle in the sale (Lot 1040) was graded EF45 by PCGS. It sold for $43,125.

While not as rare as the 1864-S, the 1873 eagle is still a seriously rare issue with an estimated three dozen or so known from an original mintage of just 800. I have handled two or three in the last five years and actually had a reasonably hard time selling them as I found this to be an issue that lacked the rarity recognition that other issues in the series have.

The last EF45 to sell at auction (an NGC EF45 coin) brought $11,212 in Superior's 9/08 auction. The last transaction of any sort was an NGC AU58 sold by Heritage in June 2010 that realized $27,600. Based on these two transaction and on my knowledge of the series, I figured that the 1873 in the Rumsey sale would bring somewhere in the $15,000-20,000 range.

Why did it sell for so much this time? I think there are a few reasons. First of all, at least two people really wanted this coin. Even though the opening bid was a very strong $24,000, these two bidders slugged it out until the final bell rang at $37,500. Strong price? Yes! Crazy price? Maybe not...

As I thought about the 1873, I had the following realization. For years, this was an absurdly undervalued date. The NGC AU58 that sold for 28 grand in 2010? Even though it wasn't a cosmetically appealing coin, even then I knew it was really cheap. And here's why. For years, the quartet of very rare business strike Type Three Philadelphia double eagles traded in the $5,000-10,000 range for decent EF examples. But after they suddenly got hot, prices rose to $20,000, then to $30,000, then even higher. An 1873 eagle is just as rare as any of the Big Five Philly Type Threes. Why should it sell at such a discount? Especially now that Liberty Head eagles have some strong collector support?

The 1876 eagle in the Rumsey sale (Lot 1047) was graded AU53 by PCGS and it also sold for $43,125. To me, this was a very surprising price.

I find the 1876 to be less rare than the 1873, despite a lower mintage of 687 coins. There are around forty to fifty known and I can recall having owned at least three in the last two to three years. Like the 1873, they were not an easy sell even with the fact that the mintage figure is the second lowest in the whole series after the 1875.

Heritage 10/10: 4892, graded AU53 by PCGS, was a good comparable to the Rumsey coin and it sold for $14,950. I figured the Rumsey coin might bring as much as $20,000 and it opened at just $13,000. Again, two bidders slugged it out and this time, the match lasted longer.

Good deal or bad deal? I liked the coin better than the 1873 (I thought it migt upgrade to AU55 if resubmitted) but I didn't think that the 1876 carried as much opportunity cost. In other words, I would have told a collector that if this one doesn't work out, it's possible that another decent coin will turn up in a year or so; maybe even less. So, on this one, I'm going to have to vote more towards the "not a bad deal but probably not a good deal" camp.

As is so often the case in my writing (and my thinking!) I've gotten a bit off track and still don't feel that I've totally answered the original question in this blog: "how do you price really special coins?"

I've mentioned above that published price information is not a good indicator for really rare coins. And while sometimes helpful, auction price data has to be very subtly interpreted to be truly helpful.

Ultimately, the price of a really special coin boils down to what your gut feels that it is worth. If you are willing to pay $25,000 for a decent 1864-S eagle and you've been waiting four years for the chance to buy one, shouldn't you be willing to pull the trigger at $30,000 or even $35,000?

What I find most helpful is knowing the series in question very well. As I mentioned above, the Liberty Head eagle series has become more popular in the last two or three years than at any time I can remember. So pre-2010 auction prices often have to be taken with a grain of salt. And it helps to know that certain other rare issues, like the 1883-O, have a number of recent auction trades and private sales in the $40,000-70,000 range. The 1883-O is more popular than the 1873 and the 1876 but it is of comparable rarity. If an AU50 example of this date is worth $50,000-60,000 then shouldn't an 1876 in AU53 be worth at least half this?

These are the sort of questions that make numismaics such an enjoyable pasttime to me. Do you have questions or comments regarding the values of really special rare coins? If so, please feel free to email me at dwn@ont.com

Are Gem Type Two Gold Dollars Underpriced or Overpriced?

I recently bought and sold a coin that I hadn't handled in quite a few years: a Gem Type Two gold dollar. For those of us of a certain age, this is an exciting coin and one that got me to thinking: is this a type that is underpriced or overpriced? My thoughts on this subject follow. Back in the 1980's, my mentor in the rare coin business, Paul Nugget, told me an interesting story about Type Two gold dollars. He said that in the 1970's, Type Two gold dollars were essentially unknown in Gem Uncirculated and were very hard to locate even in what, today, would represent the MS63 to MS64 grade range. I have always found it curious that this once-rare type became so much more available in the ensuing years; a subplot to this story that I'll touch on in a moment.

For those of you who are wondering "what is a Type Two gold dollar," it is a short-lived design type of gold dollar that was introduced in 1854 and replaced in 1856. It features a small Indian Princess portrait on the obverse and it is a type that is notorious for strike-related problems such as clashmarks and weakness at the centers as a result of a flawed design that made it nearly impossible to fully strike up.

The two issues of this design that are seen most often are the 1854 and 1855 Philadelphia dollars. When people refer to "Type Two dollars" as a specific type coin, it is likely that they are speaking about one of these. Type Two dollars were also made, for one year only, in Dahlonega (1855-D), Charlotte (1855-C), New Orleans (1855-O) and San Francisco (1856-S). The branch mint issues are scarce to rare and remain very popular with collectors.

When collecting gold coins by type was in its heyday, the Type Two dollar was the single rarest and most expensive member of the twelve-piece type set. I can remember Type Two gold dollars in MS65 trading for over $50,000; in some cases as much as $55,000 to $60,000.

Today, the same coin is worth $30,000 at most (if the coin is really nice, in a PCGS holder and CAC approved) and more likely around $27,500.

What happened?

As far as I can tell, there were at least four things that occurred, all of which conspired to really hurt this market. The first is gradeflation. When Type Two gold dollars were worth $50,000+, they were superb coins. Today, I see many (if not most) Type Two gold dollars graded MS65 and I go "meh..." The coins range from not-so-nice to decent but very few are what I feel are Gems. This lessening of standards has clearly hurt the market for this type.

The second factor is a change in collector taste. In the 1980's and 1990's, many rare coin firms encouraged new collectors and investors to assemble twelve coin gold type sets. When these sets were in vogue, the Type Two dollar was the key issue. But these firms have stopped selling Gem U.S. gold for type sets and the whole concept has, for all intents and purposes, fallen off the map. When no one is collecting gold type sets, the demand for Gem Type Two gold dollars drops appreciably.

The third factor is an inversion of the classic supply and demand ratio for these coins. A decade ago, there were always people looking for Type Two gold dollars in Gem for their sets but very few coins around. Today, there are few people looking for them but a reasonably large supply. As I write this article, PCGS and NGC have combined to grade 149 Type Two gold dollars in MS65. Even factoring in resubmissions, it is still likely that as many as 90-110 Gem Type Two gold dollars have been graded, not to mention another 37 combined by PCGS and NGC in MS66. Clearly there are not 100 collectors who want Gem Type Two gold dollars.

(Interestingly, the level of demand for branch mint Type Two gold dollars has soared in the last decade. By virtue of being scarce, interesting and numismatically significant due to theit status as one-year types, coins like 1855-C and 1855-D dollars have risen in value--dramatically in the case of the latter--and are far more in demand than high grade examples from the Philadelphia mint).

I think there is one more factor that has hurt the value of this type: its small size. Let's face it, coin collectors are not getting any younger and the typical demographic of collectors who can afford a $30,000 Type Two gold dollar is over 55 and unable to see a coin this small without strong magnification.

Before closing, I'd like to address one point I raised earlier in this article. I mentioned that there is an aura of mystery around Gem Type Two gold dollars. How did a type that was virtually unknown in Gem thirty years ago become a coin that is featured for sale in every major auction these days? Part of it is certainly gradeflation but I think the answer is deeper than this. I don't know for certain but I think there is/was a hoard of high quality Type Two dollars that was quietly and brilliantly released into the market, a few at a time, for years. I don't know the specifics about it but how else can you explain a coin going from virtually unknown to nearly ubiquitous?

So what's my conclusion? Are Gem Type Two gold dollar undervalued or overvalued? Given the current state of the market, I'd have to pick overvalued. At $30,000 or so for a real Gem, they just don't seem like a good buy to me. At $15,000 for an MS65 I am certainly a buyer and maybe even at $20,000 for the right coin. But at $30,000 I'd rather have a nice, well struck 1855-D dollar in Choice AU or a properly graded MS63 1855-O dollar.

Why Are Some Rare Coins Undervalued?

Why are some coins clearly undervalued? I could answer this question existentially and say “because some have to be.” But the answer to this question is worth a little more exploration. Here are some things to consider about the valuations of coins. First and foremost, many of the areas of the rare coin market are thinly traded. In some cases, published prices for coins are speculative due to no examples having ever traded or they represent older price levels that have not been updated in many years. There are times when I am trying to figure what to bid for a very special rare coin at auction and I’m not sure I can scientifically pinpoint the exact price level. This can even be the case with coins that aren’t all that special but which haven’t traded in a long enough period of time to make their current value baffling.

Coin values are predicated by a supply and demand ratio. I have used this scenario enough times that it is now a semi-cliché but consider the following. If there are ten examples known of a certain coin but only three people care, it has an oversupply and its value is probably not very high despite its rarity. But if the same coin has thirty avid collectors than it will probably have a strong level of value.

This supply vs. demand situation is why some truly rare coins remain undervalued. As an example, look at a coin like the 1867 quarter eagle. Only 3,200 were struck and the most recent PCGS population figures show that just twenty-four have been graded. Despite this fact, the current value in AU55 is a whopping $1,500 or so. Shouldn’t this be a $3,000 or even a $5,000 coin? In theory, yes it should. But practical experience dictates that the level of demand for 1867 quarter eagles, which is virtually non-existent, keeps the price low. Advocates of the 1867 quarter eagle will counter with the argument “well, if this were an Indian quarter eagle with a population of twenty-four in all grades, it would be worth 10x in AU55.” In theory, this argument has merit. My counter-argument would be that the Indian Quarter Eagle series is many times more popular with collectors and that this is essentially an apples to oranges comparison.

The coin market is clearly becoming more and more researched-based as time goes by but I think the entire pricing system we have is antiquated. Let’s get back to the point I made in the second paragraph, about the market having thinly traded areas. These infrequently traded series are often compounded by a lack of good pricing information. I am always impressed by collector-dominated series like early Large Cents or Bust half dollars that have databases of pricing information available to collectors. The rare gold coin market doesn’t have this (yet) and I think it would be a real shot in the arm if someone were able to produce a price guide that helped dealers and collectors accurately determine values.

What I’d like to see even more is for an appearance-specific price guide to exist for these coins. Collectors of early Large Cents classify coins by three categories: choice, average and “scudzy.” Let’s say collectors are offered a certain die variety of 1796 Large Cent. A choice coin may be worth $5,000, an average coin $3,500 and a very low-end coin might only be worth $2,000. I’m not certain that these variations would be as extreme for, say, an 1854-C quarter eagle in slabbed AU55 but I do personally think a nice coin for the grade is already worth considerably more than an ugly one.

Getting back to my original point: why are certain coins undervalued? As I stated earlier, the major reason for this is that they are just not that popular. Another reason--one that is harder to give an explanation to--is that in any long series, it is inevitable that a percentage of the coins are “sleepers.” I previously mentioned that the lack of accurate pricing information in the market means that it is always going to be inevitable that a number of coins fall through the cracks. The value of being a specialist is that you will learn what coins are the sleepers before they become more widely known.