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TPG Grading Thoughts

Originally published on January 12 2015 and February 2018

I would like to discuss a serious topic in today's blog; the negative impact of TPG over grading on the numismatic hobby. Over Grading is a slow growing issue that builds up over many years and leaves a legacy of problem coins in the marketplace and degrades prices for the outstanding coins.

Before I go further, we need to consider the entire TPG grading process and what we as dealers or collectors are paying for. Processing coin grading submissions requires lots of logistics and quality control that fundamentally don't add value and are done primarily to protect the grading services against liabilities. The primary value provided by TPGs is that brief period of time when a grader examines a coin and renders his decision about originality and grade. We hear stories of graders having 30 seconds to grade a coin...those 30 seconds are the value proposition of the TPG service but is executed with variance.

Graders are human beings and conduct their jobs with a certain amount of variance. That variance can result from many personal or on the job parameters.....inexperience with strike characteristics of certain series, the inattentive day, having a cold, under stress or looking at modern coins all day and then faced with an early type submission. One coin, if graded 100 times with grading occurring every second day among other submissions, may have a grading distribution that looks like this. In statistics, we call this a normal or Gaussian distributionIf we look closely, the normal distribution has tails....those coins that are Under Graded (UG) and those that are Over Graded (OG). In an ideal world, the TPG graders would produce a very tight distribution without tails and for some reason, the collecting public makes this assumption as fact. Those of us who submit and resubmit coins frequently see the variance first hand.

So what happens to Under Graded coins? Of course, they are cracked out to secure the proper or average grade with financial benefits for the person taking the risks. The hobby has an automatic mechanism to deal with UG coins and dealers/collectors are more than willing to remove these from the market, resubmit until the coins reside in a higher graded holder. So the life span of an UG TPG coin is typically short. Once the market self corrects, then the remaining distribution might look like this as some of the average coins have been over graded via resubmission.

What happens to Over Graded coins? These are the poison that build up in the market place year after year seeking a home. Many OG coins languish in dealer stocks until a naive buyer comes along and believes the assigned TPG grade is a guarantee of the actual grade. The collector buys the coin and it is removed from the market place. If the market is weak, then the number of inexperience collectors drops and dealers are stuck with these OG pieces they may have made or purchased by mistake. If dealers need to raise cash, then higher value OG coins are consigned to a major auction house and losses are taken. Lower value coins will end up at 2nd tier online auction houses...but the problem remains until OG coins end up in collector hands.

What happens to Over Graded coins at auction houses? Of course, they bring lower prices than the Trend Guides at the TPG assigned grade. Let's consider this scenario...three TPG AU graded 1842 Seated quarters are consigned to an auction house. One is accurately graded while the other two are over graded or have problems that TPG graders ignored. The accurately graded piece will attract dealer and collector attention but the inferior pieces will be primarily targeted by the dealers as inexpensive or by inexperience collectors wanting to score a scarce piece at a cheap price. So the inferior pieces sell below the Trend Guides. If enough OG coins are processed through the auction house, a trend develops and the Guides are adjusted down to a lower level. Is this indicative of what an accurately graded coin is worth? Of course not! But the Trend Guides are gospel to most collectors and dealers for conducting normal business.

Bottom line is that Over Graded coins degrade the value of accurately graded coins with only astute dealers and collectors willing to pay well above the guides for accurately graded coins. Now financial risk management enters the equation. Many people become shy about paying strong and above the Trend Guides. If the TPGs become loose, then the problem is magnified. Trend Guide prices decrease since the market is saturated with OG coins. No knowledgeable collector with accurately graded or UG coins wishes to sell in this environment as they demand fair value for their holdings.

Though I am a small dealer, this essay highlights why I am so vigilant about accurate TPG grading and remind collectors about grading variances or problem coins being certified. TPG lack of consistency (a tight Gaussian Distribution is what the hobby expects) has a negative long term impact on the hobby including a degradation of grading standards.

PCGS Straight Grading Off Quality Coins is Impacting Hobby

At the Sarasota show, one of the local Heritage buyers was present and complimented GFRC on inventory quality. A conversation then ensued concerning the hobby and decreasing prices for certain series. The discussion focused in two areas; aging demographics and loose PCGS grading standards. Prices for mint state coins, Barbers for example, have been dropping due to lack of demand creation. Liberty Seated and Bust coinage pricing has been stable due to efforts by the collecting community to promote and maintain interest levels. The other core issue is the amount of problem coins "being made" by PCGS that end up being sold at Heritage auctions and feeding CoinFacts records. As pricing records drop, collector and dealer purchase price expectations also decrease.

At Long Beach, Heritage offered a huge group of Liberty Seated dollar with many being off quality. Following is commentary from a Daily Blog reader who monitored the auction.

Today at a Heritage auction, I saw something disturbing involving seated dollars. I selected to follow about a dozen and was surprised how cheap some went for. I didn't bother tracking the obviously played with dollars even if in regular slabs. I only tracked dollars that were nice for the grade and appeared not to be messed with to much. They graded from AU to MS 63. All but two were common dates or circulated proofs. I understand that a circulated proof is not worth as much as circulation strike coin but, the prices paid was at least 25% cheaper than what I would expect. The mint state 61 and 62 dollars also went 25 to 20% cheaper than I would expect. One of the scarce dated coins was a 1856 in an ANACS slab that went for the money a PCGS coin would sell for. It was a nice coin! Some of the other dates also went cheap.

I believe PCGS and NGC are slabbing a lot of EF and AU coins that have been played with (dipped at minimum) and those coins are dragging the prices down. I think for the short term, it is time to cherry pick the nicer coins that slip through and aren't noticed. There is to much junk on the market and people are buying them because they think they're getting a bargain. This won't work out for them in the long run and is hurting the pricing of truly nice coins.

Dan White had purchased a nice light gray and perfectly original 1908 Barber half dollar prior to the Sarasota show and was considering having it graded at Baltimore. I studied the piece and graded it AU53. There was obvious wear on the upper wings and the eagles tail feathers with breaks in the luster. Dan takes the piece to the ICG table for an opinion. At least AU58 and maybe mint state was the response. Really? Second guessing myself, I asked a New England dealer that just happened to be at the GFRC table inspecting inventory for a grading opinion. Nice original coin, but no question AU was the response as wear was obvious. So did the senior ICG grader give a higher opinion to secure a submission? Maybe ICG rewards strictly original coins with higher net grades?

I'm not making this stuff up and can see why the average collector views numismatics as a complex challenge.

Fundamentally, the grading services have an unsustainable business model. They must continually expand the number of coins being graded or must raise fees per coin if volume is dropping. Over time, most coins worthy of a straight grade are indeed graded. Then what? Expansion into overseas markets is an alternative. But for the core United States market, there are near term approaches to maintain revenue; plus grades, variety attribution, special labels, crossover special events and of course gradeflation. Eventually, all of the marketed special services play out and the TPG still faces the inevitable challenge...a shrinking number of coins to grade. Are we surprised that PCGS is straight grading more marginal coins?

Ok, let's review some feedback. This comment is from a serious collector and individual with corporate background.
I guess I will have to start calling you Laura. Comments today are VERY similar to comments Sperber has been making for years. By and large I agree with them and, perhaps, it will be getting worse before it gets better. Collectors Universe reported a very bad quarter and its stock had a major drop. I don't own it so it did not impact me but the conference call mentioned dropping volumes.