Value Compression: A New Trend in the Dated Gold Market

In the past few years, I've noticed an interesting trend in relation to the pricing of rare date gold coins. I refer to this as "value compression." Let me explain what I mean. When I mention this term I am referring to a small price premium between grades. The classic value-compressed issues have long been the Iowa and Roanoke commemorative half dollars. According to the most recent CDN Greysheet , the difference in value between an MS60 and MS65 Iowa half dollar is a whopping $12 (!) while a Roanoke shows a value increase of just $70 between MS60 and MS65.

This phenomenon has begun creeping into the United States gold market as well. Areas which appear susceptible to value compression include common date St. Gaudens double eagles, gold dollars, lower grade Carson City double eagles and early gold in the EF45 to AU55 grade range.

Why do values compress in certain series? The most basic explanation has to do with current grading standards and appearance; a secondary reason is based on the actual design and size of a coin.

As an example, an 1851-C gold dollar is a $1,250-1,350 in EF45 in today's market. In AU53 it is worth in the area of $1,500-1,600. Why is there such a small difference for what should be a pretty hefty increase in grade? This is mainly due to the way that these coins are now graded. There is no longer much aesthetic difference between an EF45 and an AU53 gold dollar and the market recognizes this by compressing the price spread between these two grades. In the case of the 1851-C dollar, the value is even more compressed between an AU50 and an AU53 or an AU53 and AU55. Simply put, if a collector can see no discernible difference between two grades, then why pay a premium.

In no series is this compression more evident than with common date St. Gaudens double eagles. If you take a random sample of freshly graded MS62 coins and freshly graded MS64's, there is probably going to be little difference. In fact, the 62's might even be nicer than the 64's. This inconsistency of grade is why an MS62 is currently worth $1,450 and an MS64 is worth just $1,600. Back in the days when there was an appreciable difference between the two grades, there was an appreciable price difference.

I mentioned above that there were other reasons besides current grading conditions that influenced value compression. Two of these are a coin's size and a coin's design. Small coins are hard to see and harder to appreciate differences in quality. It makes sense that gold dollars, as an example, are a series in which values are likely to become more and more compressed as collectors become older and less likely to be able to see a small mark in the obverse field or a tiny reverse dig. Certain coins have designs which makes subtle grading differences very hard to detect. The Iowa and Roanoke half dollars have extremely busy designs which make it hard to detect marks. An example of a gold type with a "complicated" design is an Indian quarter eagle. There are still fairly good-sized price spreads between grades in this series (especially in MS63 to MS64, MS64 to MS65 and MS65 to MS66) but the spreads between lower Mint State coins are small and getting smaller.

I mentioned two other areas that are showing value compression: lower grade Carson City double eagles and early gold. These are interesting case studies for two different reasons.

For an 1875-CC double eagle, the current Trends values for lower grade coins are as follows: VF20 is $1,750, EF40 is $1,850, EF45 is $2,000 and AU50 is $2,250. Think about this: only a $500 spread between a VF20 and an AU50! No matter how sloppy grading gets, there will always be an appreciable difference between the VF20 and the AU50; certainly enough to justify paying an extra $500 for the higher quality coin. I think the value compression is related to two factors. The first is that Trends is behind the market on CC double eagles. The second is that the collector base for an 1875-CC tends to favor an EF or AU coin and shies away from the VF, making for a small demand factor for the low end coin.

Early gold is a bit more interesting to look at. I recently purchased an 1805 half eagle in an old green label PCGS AU50 holder. It was a lovely coin with original color and surfaces and a "lock" AU55 in today's environment. I had to pay $9,250; a strong price but one that I was comfortable. If I broke the coin out of its old holder and it regraded AU55 it would have been worth around $9,500-10,000. Which basically meant that I had around $250-500 upside. My ultimate decision? I left it in the old holder and sold it "as is" for $9,750.

Why are the values of early gold becoming so compressed? I'd have to say its a function of inconsistent grading, especially in the AU grade range. I often see recently graded AU50 or AU53 Capped Bust Right and Capped Bust Left half eagles that appear essentially no different to me than coins in AU55 and AU58 holders. Clearly, other players in this market agree with me and they have adjusted their buy levels up for nice AU coins and down for schlocky ones. Others areas in the early gold market that appear to have the same thing happening are small size Capped Head Left quarter eagles (1829-1833 issues) and Capped Bust right eagles (1799-1803 issues). In the case of the former its a size and design issue; in the case of the latter its clearly a function of grading standards.

My guess is that for the time being you'll see more and more value compression and in some areas that formerly seemed "uncompressable." I already note areas like Charlotte and Dahlonega half eagles where I'll pay more for a really nice crusty EF45 common date than I will for the same issue in scrubbed-up, ugly AU50.