by Ron Guth

Past V.P. of PCGS Grading Service

The grade, or condition, of a coin is a description of it’s current state of preservation, taking into account the amount of wear, the strength of the strike, the overall eye appeal of the coin, and the amount of luster which still remains. From the time a coin is struck, it is subject to a number of environmental and chemical factors which will affect it’s grade. Sulfur dioxide in the air we breath will tarnish a silver coin, humidity will cause nickel coins to spot and corrode, and poly-vinyl chlorides in the vinyl “flips” we use to store coins in will cause a green slime to form. It is a given fact that, over time, the level of condition of all collector coins will diminish. This is due not only to the chemical factors, but also to such factors as improper storage, improper handling, theft, and outright destruction. Thus, it is important to be able to determine the appropriate grade of a coin, but also to understand it’s various components so that we may preserve the coin for future generations.

Years ago, when prices for coins were very low, the grading system was very simple. The coin was either circulated or uncirculated, meaning simply that it was either worn or it wasn’t! Today, however, a small increase in the grade of an uncirculated or proof coin may translate to a difference of hundreds or thousands of dollars. Therefore, new grading systems have been established which have been described as “precision grading.” Rather than the old adjectival descriptions for coins (i.e. Good, Very Good, Fine, etc.), most graders now use a numerical system based on the grading scale set forth by Dr. William Sheldon. Sheldon originally applied his scale to Large Cents, noting that a Very Fine coin was worth twenty to thirty times that of a Fair coin, and that a Mint State coin was worth roughly sixty times that of a Fair coin. Using this relationship, Sheldon developed his system based on a scale from 1 to 70, with 70 being the finest possible grade. Over time, the price relationship between the grades changed, but the system became so popular that it was eventually applied by collectors and dealers to all other areas of American numismatics, and when blended with the older adjectival systems, became the basis for the precision grading of today.

For many years, grading has been perhaps the most controversial area of numismatics. Because of the lack of standardization, it was easy for unscrupulous dealers to take advantage of the collecting public by buying at a lower grade and selling at a higher grade. Naturally, when prices were low, this abuse did not amount to much in terms of actual dollars, but in the late 1970’s and early 1980’s, when coin prices were going through the roof, many individuals made a “healthy” living off these windfall profits. The situation became even more untenable once coins began being touted as investments, especially when many of the so-called “investments” turned out to be over graded, over-priced deals which were worth a fraction of their original price. To make matters even worse, the American Numismatic Association admitted around 1985 that grading standards had changed, meaning that a coin which graded MS-65 in 1980 was no longer an MS-65 in 1985 (and it’s value, as a result, was often less than what was paid for it five years earlier)! This admission provided an “escape hatch” for the unscrupulous individuals who needed to get out of their obligations to their investors. Thus began the massive exodus of investors from the coin market. Without standardization of grading, they were unwilling to participate in or return to a market which had manipulated them so badly.

Now, precision grading is being hailed as the ultimate grading solution; one which will instill confidence in the investor and open up Wall Street markets to numismatics. Has this happened? Yes, but with a cautious, “wait-and-see” attitude. With the advent of precision grading came the professional certification services. These services hire professional, expert coin graders who examine each coin and decide upon a numerical grade. The advantage to these services is that the coins are examined by not one, but several graders and a finalizer who determines a consensus grade for the coin. It’s akin to buying a coin and then showing it to several trusted dealers for their opinion. Another advantage is that sight-unseen markets have developed for most certified coins. In the old days, to sell a coin, a collector would have to ship the coin to a dealer who would examine the coin and attempt to purchase it as cheaply as possible, often knocking the grade in the process. Today, it is possible to call a dealer on the phone, give him the certified grade, and obtain a bid which may be confirmed without the dealer ever having seen the coin! Even better, there is absolutely no argument over the grade, eliminating what has been one of the worst abuses in our industry.

Because of this new aspect of coin grading, large Wall Street firms are eyeing coins as an alternative investment medium. By standardizing the packaging and eliminating the grading problem, certified coins have attracted old and new investors to the field. Respected Wall Street investment firms have formed various limited partnerships and investment vehicles for trading slabbed/certified graded coins. This is currently most evident in trading in what are referred to as ‘generic coins’ (coins which are in strong demand and plentiful supply, such as MS-65 Morgan Dollars and Double Eagles). The retail investment markets have not yet picked up on the certified rare coins, but already considerable pressure is being felt in the rare coin market. Just the mere mention that another firm is about to enter the market creates a stir in the industry and a mood of general optimism. If and when the retail investment market becomes a serious factor, coin prices could sky-rocket because there are simply not enough nice quality coins to feed the demand.

What’s in store for the future? Investigations are already being made into the possibility of computer grading, where an optical scanner, tied to a computer is used to determine a totally objective grade. While there are some major obstacles to be overcome in such an approach, computer grading is not as far off as one might suspect. If perfected, it will yield the most consistent and accurate method of grading coins. However, it is unlikely if a computer will ever be able to determine one of the most critical aspects of grading– that of eye appeal. For instance, it would be difficult for a computer to detect the subtle nuances of a beautifully toned coin, any more than a computer could analyze the aesthetic value of a Picasso or a Rembrandt. Thus, coin grading will always rely in part on the human aspect, but in so doing will always result in differences of opinion.

For the moment, it would appear that certified, consensus graded coins are the safest bet for the numismatic collector/investor. They offer the latest advances in numismatic grading and they incorporate “precision grading.” Because they are often traded on a sight-unseen basis, they are the most liquid, marketable coins for the persons who are unable or unwilling to learn coin grading for themselves. Yes, the advances made in coin grading have been great, to the advantage of today’s collectors and investors!