Incremental Grading

Old time collectors often bemoan the fact that there are "too many grades." In their opinion, there is no need for a ten point Mint State/Proof scale (i.e., Mint State-60 to Mint State-70 and Proof-60 to Proof-70) and even less of a need for multiple numerical levels in the circulated grades. I strongly disagree with the theory that there are too many grades. In fact, I can let you in on a secret that would make many of these old collector's eyes roll if they were aware of it. Expert graders, such as myself, actually use a whole series of "secret grades" (which I refer to as "incremental grades") when examining coins.

Before I explain what incremental grades are, it is important to understand why they exist. Back in the "old days," coins weren't very expensive and there were not very large spreads between nice coins and not-so-nice coins. A really superb 1927 $20 might sell for $55-60 while an average quality example was readily available for $50-55. This all changed when coins became more popular and a greater emphasis was placed on owning "the best." Today, a superb quality 1927 $20 might sell for $4000-5000 (or more) while an average quality Uncirculated example is worth just $400-500.

The most important thing to remember about grading is that it is subjective. While most experts can reach an impressive degree of consistency when grading a group of coins, there is always some room for disagreement. The reason this exists is due to the fact that a grade actually represents a shorthand for a range of grades. This is where the aforementioned "incremental grades" come into play.

Let's say, for example, that we are discussing a coin that grades Mint State-63. In actuality, the "63" grade is a shorthand for an entire range of grades that goes from 63.0 to 63.9. A coin that is regarded as a "63.0" is extremely low end for the grade. If it were examined by ten experts, four or five of them might not even call it a 63 and it could very well grade MS-62 if submitted to PCGS or NGC. A coin that is regarded as 63.9 is extremely high end for the grade. If ten experts examined it, half of them (maybe even more) would call it a 64 and it could easily grade MS-64 if submitted to a grading service.

An incremental breakdown for the Mint State-63 grade is as follows:

MS-63.0 to MS-63.2: A very low end coin for the grade. If a savvy dealer were offered such a coin already in a PCGS or NGC holder, he would not remove it for fear that it might be downgraded if it were resubmitted.

MS-63.3 to MS-63.5: A coin that is average quality to slightly above average quality for the grade. A coin at the upper range of this grade would be regarded as having a 50% chance of upgrading if it were resubmitted to PCGS or NGC. A knowledgeable dealer would probably pay a modest to significant premium for such a coin.

MS-63.6 to MS-63.9: A very high end quality coin for the grade. If such a coin were already encapsulated in an MS-63 holder, it would be regarded as an excellent candidate to "crack out" if shown to a knowledgeable dealer. Coins such as this generally trade for large premiums.

Grade and price go hand-in-hand. And when coins can be worth many multiples more in one grade than another, this means that two coins in the same PCGS or NGC holder can be worth considerably different amounts of money.

How significant are incremental grades on a coin in which a one-point improvement can mean a very substantial amount of money? Let's look at randomly selected issue: an 1860 double eagle in Mint State-63.

According to the March 2000 issue of the Coin Dealer Newsletter Quarterly, a Mint State-63 1860 double eagle is bid at $14,000 while an MS-64 is bid at $35,000--a value spread of $21,000. How would a smart dealer value a Mint State-63 1860 double eagle if he were figuring it as part of collection he were attempting to purchase or if it was a lot in auction he was attending?

This dealer's decision would be predicated on a number of factors. First, he might look at a PCGS or NGC population report and see just how rare the 1860 double eagle is in MS-63 and MS-64. A quick search of the February 2000 PCGS figures show that this service has graded two in Mint State-63 with two better (an MS-64 and an MS-65) while NGC has, as of January 2000, graded two in MS-63 and two better (both in MS-64). The combined population of four coins in MS-63 with just two better demonstrates that high grade 1860 double eagles are legitimately rare.

The next factor he would consider is the popularity and subsequent marketability of such a coin. Is the Liberty Head double eagle series popular and are there customers for an expensive, high grade 1860? If the dealer is a specialist in Liberty Head double eagles, he is well aware of his ability to sell such a coin and he probably already has a few potential customers lined up for it. If the dealer is not a Liberty Head double eagle specialist, he will either determine its marketability by asking another, more knowledgeable dealer or he will decide not to take a risk on such an expensive coin.

Now that our hypothetical dealer has performed his due diligence and has determined that this high grade MS-63 1860 double eagle is a truly rare and saleable coin, he can grade it incrementally and value it accordingly. An incremental range of prices that he would pay for this coin might be as follows:

MS-63.0 to MS-63.2: In this grade range, the 1860 double eagle would be regarded as "product" if it were already in a third-party grading service holder or as a low-end coin if it were unencapsulated. Assuming that the dealer had a client for the coin or he thought it could be sold in a relatively short period of time (60 days or less) he would probably figure its value in the $12,500 to $15,000 range.

MS-63.3 to MS-63.5: In this grade range, the dealer would be willing to pay more for the 1860 double eagle. If the coin were just a 63.3--meaning that it was just average quality--he would probably still figure it around CDN "bid" level. If the coin were a 63.5--meaning that the coin was nice and had maybe a 50% chance of grading MS-64--the dealer might figure it at $17,500 or a bit higher. This would mean that if the coin did not grade MS-64 after it had been submitted (and resubmitted) to a grading service, he would have a few thousand dollars downside (assuming he could not sell it to a retail client as a "premium quality" specimen) but would have had considerable potential upside if the coined had worked and been graded MS-64.

MS-63.6 to MS-63.9: Here's where determining the value for such a coin gets dicey. The dealer now has to really weigh the upside and downside of his potential purchase. Let's say the coin is a 63.8 in his opinion and he is willing to pay $23,000 for it. This means that he has around $9,000 downside (using the CDN bid of $14,000 in MS-63 as his "cash out" price should his gamble be unsuccessful) and $12,000 upside (using the CDN bid of $35,000 in MS-64 should the coin be graded MS-64 by PCGS or NGC). While I would not personally like the risk/reward ratio inherent in these numbers, many dealers would; especially the "adrenaline junkies" who populate the world of wholesale trading and the upgrading/"cracking out" subculture.

What these figures show is that an MS-63 1860 double eagle could be worth $12,500 to $23,000 based on its incremental grade. This explains why two identical coins in an auction might sell for vastly different sums.

If you are unwilling or unable to learn how to grade incrementally, you could be leaving thousands of dollars on the table the next time you sell an expensive coin with a high value spread between one grade and the next. My suggestion is that you work with a very knowledgeable dealer who understands the intricacies of incremental grading in your area of specialization.