From a Collector’s Market to an Investor’s Market: Reasons, Consequences, Opportunities, Part 2

The Most Important Milestone on the Way to an Investor’s Market: Grading Companies

The decline in value that many collectors experienced in the 1980s had a lasting effect on the traditional relationship of trust between coin dealers and collectors. Stories about the black sheep among the dealers were told in the media and at collectors’ meetings. This was comfortable. No customer wanted to admit that he had made a bad investment driven by his greed. They didn’t blame their own stupidity, they blamed the seducer, and for them that was, of course, the coin dealer.

This gap in trust became the basis for a completely new business model, first established in the USA. People there, of course, were particularly fond of collecting US coins. These coins are machine-made and rarely have interesting designs (dear US reader, please forgive me for this generalisation). Nevertheless, it was the special characteristics of US coins that reduced the criteria for the value of an individual piece to preservation and rarity.

To understand this, consider the many characteristics that (still) determine the value of a Greek coin: there is the popularity of the mint, the skill of the die-cutter, the centring of the design, the patina and, last but not least, the provenance. If the new grading institutes had been confronted with such a large number of criteria, they would have been overwhelmed.

Now, as I said, rarity and condition determine the price of a US coin. Even a novice can easily find out about a coin’s rarity in the relevant magazines and catalogues. They will also find a price for each condition. But how can you be sure that the dealer has described the coin’s condition correctly? Is the dealer really selling a genuine piece or is it a counterfeit? All of these questions were making potential investors nervous until a simple solution was found.

The solution was professional grading by a service provider that prided itself on having no financial interest in the coin’s grade. The Professional Coin Grading Service (PCGS) was founded in 1986 and the Numismatic Guarantee Corporation (NGC) in 1987. We all know what a crucial role these companies play in the global coin trade today!

They did not use the admittedly very simple European grading system of “very fine”, “extremely fine”, “FDC” and “proof”. Instead, they used the numerical system invented by Dr William Sheldon (1898-1977) in 1949 for his book on the early US cent. The Sheldon scale ranges from 1 (worst possible condition) to 70 (perfect uncirculated condition). The grading institutes have turned the question of what parts of US coins must be perfect in order for a coin to be graded a certain way into a science of its own, so it is difficult for a layman to disagree with their grading.

What Does a Grading Add to a Coin?

At this point we should briefly consider what a grading does for a coin. It not only defines a condition, but also introduces an additional level of rarity. Coins that are extremely common in average condition can be upgraded to rarity by being in exceptionally good condition with a high value on the Sheldon scale.

We have already discussed the price gap between common coins in average condition and rare coins in excellent condition. It becomes even more extreme thanks to grading.

From a Coin to a Coin in a Holder

It is an uncomfortable truth, and certainly not one that people like to talk about, that even the employees of grading companies are not perfect. The grade of a coin can vary slightly. This would be human and not a problem if a single digit on the Sheldon scale did not represent a huge difference in value.

This has consequences. While the original purpose of grading was to make the selling process safer, today investors all over the world choose to leave their coins in a holder. In this way, they avoid the risk of a lower grade being assigned to the coin in a future sale and having to accept a financial loss. Grading makes the holder with the coin an investment; the coin itself without the holder does not have the same value.

How Things Are Today

Today, the US coin market has become an investor’s market. Investors know exactly what they are buying and use the Greysheet to find out the current price of their coin. The Greysheet provides a service for US coins similar to the stock market for shares. This allows each owner to make an informed decision about whether to sell or keep their coin.

At the moment, this perfect market transparency only exists for US coins, although players around the world are trying to implement this system for 19th and 20th century national coins in their own countries. Theoretically, the same thing that exists for US coins could be created for many other groups of coins.

How Things Might Be in the Future

Coins have become an integral part of  investment portfolios. And coins will remain an investment that is bought by collectors. It offers too many advantages, especially for small investors. This means that part of the coin trading system will move towards investment trading. This is a good thing, because it keeps interest in coins alive, even if prices occasionally fluctuate.

Wherever there are large and active collector’s markets, a certain trinity will be established. This includes grading, the creation of catalogues with prices based on the grades, and their frequent – at least monthly – updating.

Fields of interest with coins that are suitable as investment objects in the sense of US coins must fulfil three criteria:

• The coins must be available in sufficient quantities.
• The coins must be machine-struck and therefore comparable.
• The coins must be offered and sold on the market frequently enough.

Let’s take a look at some areas that have the potential to be traded as investments in the sense of US coins, and some that don’t: the German Empire, for example, would be ideal. There are enough coins to satisfy a large number of collectors. And there has been a fundamental interest in German imperial coins in Germany for many decades. The coins are machine-made; all that is missing is a new catalogue to replace the completely outdated Jaeger. To this day, the Jaeger lists both common and rare coins under the same number, and the appraisals, especially for the rarest pieces, only mention a “collector’s price”.

Medieval fractional pieces, on the other hand, will always remain a specialty for actual collectors. They are too rare and there are too many different types, which is why a great deal of expertise is required. Furthermore, they are difficult to compare due to differences in centring and strike quality. They are not suitable for investment.

Let’s take a look at antiquity: it’s not so easy here, because the quality of the individual engravers varies greatly. A good portrait of a Roman emperor will always fetch a higher price than a bad one. The problem is that a novice cannot tell a good portrait from a bad one. For this reason, Roman coins are somewhere between a collector’s item and an investment. If it were possible to translate all the criteria into a numerical system, these pieces could become a widespread investment. Coins minted in the colonies under the Roman emperors, on the other hand, will never attract large numbers of investors: too many types, not comparable, too opaque a market.

That brings us to another topic, namely which categories of coins have gained and which have lost value as a result of these developments. If this interests you, subscribe to CoinsWeekly. We publish our articles on the changing coin market on a regular basis.

Our next topic will be: which numismatic objects have increased in value as a result of the change, and which have decreased in value.