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.

U.S. Coin Pricing Guides

When someone really, truly figures out how to properly compile and market an accurate, real-time pricing guide for United States coins, they are going to become very wealthy and very popular. Because, at this point in time, the pricing mechanisms for most rare United States coins are a mess. Let me explain what I mean. Let’s say you want to buy an 1858-C half eagle graded AU55 by PCGS or NGC. You do not have the coin in hand but you have seen an image of it on a dealer’s website or in an on-line auction. What’s your next step?

You’ll probably do one of two things. If you are a specialized collector you’ll look up its valuation in Coin World Trends or in the CDN Quarterly Summary. The former shows its value to be $5,000. The latter, unfortunately, does not list values for AU55 coins—only AU50 and AU58, so in this particular case it is essentially useless.

What, you ask yourself, does this value of $5,000 actually mean? If you read the fine print in a copy of “Coin Values” you will see that Coin World considers its publication to be a retail price guide. It also states “values are listed for coins that are strictly graded in each grade category according to current market standards.” So does this mean that the collector should expect to pay $5,000 for an 1858-C half eagle in AU55? Unfortunately, Trends is not really clear in explaining this.

The next step for most collectors is to search an on-line database of prices realized at auction. The Heritage Auction Prices Archives, as I have pointed out many times before, is an incredible resource with over 1,125,000 auction lots listed.

In looking up the 1858-C half eagle in AU55, a few things become apparent. The first is the frequency with which this date appears at auction. There were a total of nine different auction appearances in 2006 plus another five in 2005. Even if we assume that some were the same coin(s) sold more than once, fourteen appearances in two years is a high degree of frequency. Thus, we can make the assumption that this coin isn’t really that rare from the standpoint of total number known and it should, therefore, sell at a discount relative to Trends. The fact that it is not a terribly popular or “important” issue (like the 1838-C or 1839-C half eagles) probably would increase this discount relative to Trends.

The next thing I would look at is the most recent auction records for AU55’s. They are as follows: $3,220, $2,990, $5,750 and $5,175. Clearly, this is a huge range and this is where I think using auction price data without proper interpretation can be very misleading for the collector.

Looking back at my catalogs for each of these four AU55 coins, my notes stated the following. For the coin that brought $3,220 I felt it was decent for the grade and I think the buyer got a pretty good deal on this. The coin that sold for $2,990 was “very ugly” in my opinion and even though this was very cheap, it is a case of getting what you pay for. The coin that sold for $5,750 was in an old green label PCGS holder and I graded it “58+,” meaning I thought it had a good shot to grade Uncirculated if resubmitted. And the coin that realized $5,175 was, I felt, “very choice and original” and would upgrade to AU58.

Four coins, same date, same grade...but prices that range from a low of $2,990 to a high of $5,750.

What pricing sheets do not help the collector with is the diversity of quality within a specific grade. These prices tell me that a really lousy 1858-C half eagle in AU55 is probably worth around $3,000; or 60% of Trends. A coin that is decent for the grade (not spectacular but not something that you look at and go “yuck”) is worth around $3,250. A coin that is very nice for the grade (not an upgrade candidate but a piece that has attractive natural color and surfaces) is worth $3,750 or so. And a really high end coin (one that is a seeming candidate to upgrade to AU58) is worth anywhere from $4,500 to $5,500.

Confused yet?

No commercial pricing sheet is going to be able to give you four different quality levels for each grade. We’d be talking about a massive undertaking and a project that few people are qualified to undertake. But it can be done. Collectors of Large Cents rely on a pricing guide called CQR which gives three price ranges for a host of grades for every die variety from 1793 to 1814. This is clearly a labor of love (I can’t imagine that the publishers are getting rich publishing CQR!) but it provides advanced collectors with a set of pricing applications that, within a highly specialized series, makes sense.

What if this specialized pricing were to be applied to various other series? What if some clever entrepreneur got together a group of leading experts and had them be in charge of detailed pricing for a highly specialized market segment? As an example, you could have Stewart Blay, David Schweitz and Andy Skrabalak collectively create and maintain a database for Mint State and Proof Lincoln Cents. If I were a collector of these coins, I think I would pay $100 per year to have access to this pricing that might not be available anywhere else. By charging this amount, the owner of the pricing service could at least defray some of his expenses.

I would expect that as the coin market evolves in the future, we will start seeing some experiments with specialized pricing. I could see this idea working very well for popular series like Bust half dollars and Indian Head cents and I don’t think it would be hard to create categories of quality for popular series such as Morgan dollars (by this I mean an “A” level for extremely nice coins, a “B” level for average to above average coins and a “C” level for below average coins). Most experts, myself included, already grade coins by category and quantifying this information would be relatively simple.

Value Compression

An interesting recent trend in the rare gold coin market has been what I refer to as “value compression.” In years past, a small jump in a rare gold coin’s grade could mean an enormous jump in value. But the value jumps between certain grades are not nearly as great as they used to be. Why is this? I think the explanation is relatively simple. In the past, there used to be a lot of visual difference between, say, Extremely Fine-40 and Extremely Fine-45. And the difference between an Extremely Fine-40 and an About Uncirculated-50 coin was quite dramatic.

In today’s world, there often is virtually no aesthetic difference between an EF40 and an EF45 and, often times, an EF40 and an AU50 do not show all that much visual difference. As a result of this, the difference in values between the two levels has shrunken considerably. After all, why pay a premium price for something that does not appear to be tangibly “better?”

A perfect example of this is a common date Charlotte or Dahlonega half eagle in EF40 and AU50. In the past, you could expect to pay at least double—possibly even triple—for an AU50 as opposed to an EF40. As an example, if a nice Extremely Fine 1853-C half eagle was worth around $750-1,000 you could expect to pay around $1,500 to $2,000 for a nice quality AU coin.

Today, the value spread between these two grade ranges has compressed considerably. A nice EF 1853-C half eagle is a $2,500 coin while a solid AU is worth $3,250-3,500. What the market has realized is that there is not enough cosmetic difference between these grade levels to justify paying double or even triple for the higher graded coin.

In many cases I agree with this value compression. But I also think this compression of values has overreacted in some cases, leaving the higher grade coins very undervalued.

Let me give you an example. I recently sold a really nice 1853-C half eagle graded AU58 by NGC to a collector for $4,250. I thought I priced the coin a little on the cheap side but I like this collector a lot and wanted to pass onto him what I thought was a great purchase by me. If I owned a decent but nothing special EF45 example of this date, I would be able to sell it for $2,250 to $2,500. In my opinion, a very nice AU58 coin at around double the price of a decent EF45 is an extremely good value.

I can give you other examples of this but don’t want to beat a dead horse. My point is that with the current compression of values in the rare date gold market, there are some surprisingly good values in the AU55 and AU58 grades.

There are still numerous gold coins where a one point upgrade can mean tens of thousands of dollars in price difference. As an example, the price spread between a 1911-D and a 1915-S half eagle (to name just two) in MS64 to MS65 is well over $100,000. Think about that for a second…a measly one point increase can be the difference between, say, a $50,000 and a $150,000 coin. And the scariest part of that statement is that there are only about three people in the world who can actually tell the difference between an MS64 Indian Head half eagle and an MS65 (actually that’s a bit of an exaggeration…although not by much!).

Because of the demonstrable rarity of coins like a 1911-D or 1914-S half eagle in Gem Uncirculated, it is likely that such coins will always have a large premium over the next grade down. But how about for lower grade Uncirculated coins like MS61 and MS62?

My prediction is that we will see values further compress between the MS60 and MS61 and the MS61 and MS62 range very soon. In most cases, there just isn’t enough visual difference between, say, an MS60 1849-C quarter eagle and the same date in MS62 to justify the current Trends price jump from $25,000 (for an MS60) to $60,000 (for an MS62).

We are already seeing price compression in the AU58 to MS62 price range for small coins like gold dollars. As an example, an 1854-D gold dollar jumps from $15,000 in MS60 to just $20,000 in MS62. Why such a small jump? Because, the vast majority of slabbed MS62 examples of this date aren’t all that much better looking than MS60’s or MS61’s. On bigger coins, like eagles and double eagles, where the visual difference between MS60 and MS62 is more pronounced, it is likely that this price compression will not be as great.

Gold Coin Market's Strength

Part of me wants to think that the gold coin market’s currently high values represent a peak and that a correction is due. But the more I look at the market, the more I think that it truly has legs and that prices are not going to go down any time soon. Here are a few reasons why I think the gold coin market is not going to drop any time soon:

There are a lot more people looking to buy coins than there are people selling. As long as demand outstrips supply, prices are not going to go down. In some areas, like early gold, prices have doubled or even tripled in the past three to five years, yet the current supply of early gold is the smallest I can ever remember. When you see auction sales with a large number of interesting early gold coins for sale, this might be a sign that this area is correcting. But as long as people are more interested in buying than selling, look for prices to continue to rise.

With gold (and silver) at twenty-five year highs, coin prices aren’t going down any time soon. If both of these markets show a major short-term correction, it is likely that certain areas of the market will weaken. But I don’t think that gold dropping from $600 to $500 is going to affect the value of a rare date St. Gaudens double eagle or a rare Liberty Head eagle.

There is a lot of money in the world right now. I recently went shopping for a new house in Portland, Oregon and was pretty shocked to see how little $1 million bought you in this once-sleepy market. Not that long ago, one million dollars was a staggering amount of money to pay for a house. Today, it’s what many people pay for their second—or even third—residence. Gone on vacation lately? Taken the wife or significant other out for a fancy meal? Filled up the car? It’s an expensive world we live in these days, and the gold coin market merely reflects this fact.

The most interesting thing about this market is that it is still mostly self-generated. People really want gold coins; unlike in 1979-80 and 1989-90 when they were told they really wanted them. If you remember those two markets, you can remember insane price manipulations and wacky hype that, viewed today, seems like…well, insane hype.

One has to wonder, what will happen to gold coin prices if the Chinese decide they want to play. Or if someone really clever decides to corner the market in MS65 Indian Head gold (it’s SO easy to do!) and then expertly market the coins. Then today’s seemingly “insane” gold coin prices could actually look cheap.

Five Beginner's Mistakes and How To Correct Them

Almost every new collector makes mistakes, no matter what hobby he participates in. After many years of working with collectors, there are a number of common errors that I often see. Assuming that a collector is truly interested in correcting them (some people continue to make these basic mistakes, believing that they are "too smart" to receive constructive criticism), most can be rectified with a combination of time, money, patience, and the desire to learn to collect the "right" way. Mistake #1: A new collector pays too much for coins.

"Paying too much" is a relative term. There is a big difference between paying 5-10% too much for very nice, genuinely desirable coins and paying 50% too much for poor quality, unpopular coins. In the first instance, the passing of time will overcome a slight overpayment as will the fact that truly nice coins always sell for a bit too much money. In the second instance, the collector needs to learn how much nice coins really sell for and where to buy them.

Determining the true market value for coins is not easy. Many collectors (and even some dealers) feel that Greysheet bid or Coin World Trends is the ultimate guide for coin pricing. These guides do not take a number of factors into consideration. As an example, nice quality early type coins generally sell for numbers well in excess of CDN "bid." Conversely, certain gold issues, like high-priced San Francisco half eagles, sell for large discounts relative to Trends.

Correction:

Learn what the true market value for coins is. This can be done by studying auction prices realized, looking at what dealers are offering to sell (and buy) coins for and what other collectors you know have paid for their coins. You should also learn which coins sell for levels over published price guides and which sell for levels under these prices.

Do not be afraid to stretch for truly rare and/or desirable coins. As an example, if you pay 20% over Greysheet bid for a truly choice early gold coin, the chances are good that this "stretch" will be repaid when you go to sell your collection.

Mistake #2: A new collector buys his coins second (or even third) hand.

Many (if not most) new collectors buy coins from brokers. In numismatics, a broker is defined as someone offering a coin for sale which is not from his inventory. There is nothing wrong with coin brokers. But often times buying coins from the dealer who owns them will save a collector from 10 to 30%.

Correction:

The solution for this problem is relatively easy. Buy coins from the people who actually own them. Ask your dealer if he owns the coin(s) he is offering you or if it is from other sources. As you become more involved in numismatics, you'll learn how to see if the dealer you ask this question to is telling you the truth. If, for example, he cannot accurately describe a coin, the chances are good that he has not seen it (and does not own it).

There are circumstances when it is acceptable to buy coins from a dealer who does not own them. A dealer may act as your agent at an auction and bid on coins that are not his. Or, a dealer might call you from a show to let you know he's found a piece on your want list that is from another dealer. In this case, there is nothing wrong in using the dealer as a broker, provided his markup is reasonable. In such a transaction, a dealer generally makes a small (5-10%) profit. Since he does not own the coin and will have no downside risk in sending it to you on approval, he does not merit as large a profit as if he owned the coin and had downside risk.

Mistake #3: A new collector decides he doesn't need a seasoned professional to help him.

Every week I speak with a new collector who tells me how he has spent thousands (or even tens of thousands) of dollars with no professional guidance. Unless he is remarkably lucky, the chances are good that such a person has lost at least 50 cents on the dollar.

Buying rare coins is not easy. If you do not have someone to help you pick the right coins at the right prices, you are likely to be taken advantage of. The solution is easy: choose a reputable, knowledgeable dealer and establish a good rapport with him.

Correction:

Other than the small handful of truly expert collectors who can compete with dealers, it is important to admit that you need sound professional guidance. Few collectors have the time or ability to become experts. It is not a sign of weakness to admit this.

How do you select the "right" dealer? The most important factors to consider are the dealer's professional qualifications and reputation. Choose someone who deals in the area you specialize in. Ask for the names of some of his satisfied customers and speak with them about the dealer. Once you have found the right dealer, reward him with your loyalty. Speaking as a dealer, I can tell you it is hard for me to be loyal to a client who has his want list out with six other dealers and who mostly wants to pick my brain for free information.

Another qualification that, in my opinion, demonstrates the character and level of professionalism that you should be looking for in a dealer includes membership in the Professional Numismatists Guild (PNG). The 300+ members are the PNG represent the upper echelon of coin dealers and I would suggest you stay away from any dealer who is not in this organization.

Mistake #4: A new collector buys unencapsulated coins or third-party graded coins from less-than-reputable services.

With very few exceptions, coins that have not been graded by PCGS or NGC are graded on a standard that is too liberal. Many new collectors do not learn about the pitfalls of buying non-PCGS or NGC coins until after they buy "inferior" third-party graded coins. Not all second-tier encapsulated coins are second rate. There are some that might only be a point off. In such a case, I would suggest that these coins be removed from their current holders and sent to NGC or PCGS.

Another mistake new collectors make is to buy expensive unencapsulated coins. At this point in time, the market for encapsulated coins is so pervasive that any item that is worth more than $500 but not in a PCGS or NGC holder must be viewed with suspicion. Coin World is full of ads offering seemingly remarkable values on "raw" coins. In my experience, nearly all of these are either overgraded or, even worse, cleaned, retoned or damaged.

Correction:

Again, the solution to this problem is relatively easy. Buy coins that have been graded by PCGS and/or NGC and avoid coins graded by other "second tier" services. Purchasing unencapsulated coins, whether through advertisements or auction sales, is best left to experts. If you see raw coins listed in auction catalogs that are of interest, have a reputable dealer view them for you. If this dealer likes the coin, hire him as your agent.

Mistake #5: A new collector does not take time to learn about coins and the coin market.

I have long believed that in numismatics, education is a collector's number one ally. It never ceases to amaze me how many collectors will spend tens of thousands of dollars on coins but not one cent on coin books. At this point in time, there is more good information available to collectors than at any other time in numismatic history. There are well-written guidebooks on almost every major series of American coin and there are dozens of excellent educational websites on the Internet that provide unbiased information. If you have already spent a considerable sum of money on coins but do not own any coin books, spend $500 on a basic library of general and specialized books.

Correction:

Buy a core group of coins books and, more importantly, read them. If you collect gold coins, you should buy my series of books on branch mint issues. If you collect other types of coins, there are many good books available and I would be happy to suggest them to you. For pricing information, I would suggest you refer to Coin World Trends Online (www.coinworld.com). For rarity information, the PCGS Online Population Report is an excellent source (www.collectorsuniverse.com). For excellent photos and information on all United States issues, try www.coinfacts.com.

All beginning collectors make mistakes. Some of these mistakes are costly, some are not. Hopefully, reading this article will make new collectors step back and analyze their numismatic behavior. If you are making one (or more) of these mistakes, do not despair. Instead, think what you can do to correct them and move forward.