Wednesday, January 18, 2017

A Reaction to Mark Salzberg's PCGS Article

I read an article yesterday by Mark Salzberg from NGC about a correlation between PCGS certified coins rising populations and dropping values.

Read the full Salzberg article here.

In his piece, Salzberg asserts the PCGS has lowered its grading standards in the past five years to allow for higher grades to be assigned. The entire time I was reading the article I couldn't shake the idea that something was amiss. Obviously, NGC and PCGS are competitors, so one company's Chairman writing about the other company is always suspect. Since the post took a negative tone toward PCGS, while sprinkled with compliments for NGC, it became apparent that this was a take-down piece. The goal of a take-down piece is to lower public opinion of an individual or group, take them down a peg.

Knowing that, I wanted to point out a few things about TPGs in general.

Coin Population Reports

These numbers can only ever go up. Every time a coin is given a grade, it adds one to the population report. Every time a coin is cracked out of its slab, nothing happens to the population report. The same coin submitted two or three times will continue to increase the population numbers.

The other thing is that not all coins in existence have been submitted for grading, especially to just one company. New pieces will appear, especially now that the hobby is seeing an influx of new collectors who are quite willing to take a chance cracking out coins in old holders. (Because standards have dropped, that part is correct. Though, I'm not sure it is confined to PCGS. The fact that Salzberg felt it necessary to remind the reader multiple times that standards at NGC are top notch just makes me more suspicious.)

Anyway, my point was, population reports do not reflect reality.

Prices Are Dropping

It is a popular belief that TPG certified dealers control the prices assigned to certified coins. It makes sense. The TPG certified dealers are on the front lines, selling coins every single day, and have first dibs on all new issues. They decide what to sell the coins for and that becomes the de facto "value" of the coin.

Unfortunately for the market, this valuation system, like the population reports, is not based in reality. It's artificial. The prices don't reflect rarity, they reflect the certified dealers' profit margins, especially for new coin issues. But the same principal holds true for older issues, too. However, since you can't really set the market price for a 1909-S VDB Lincoln Cent, since examples have been bought and sold for decades, you have to influence it by selling pieces at or above the current value. Then, the certified dealers reports their sales to the TPGs, and the "values" either stay the same or increase slightly.

Over the last five years we've seen prices begin to decline. The artificial valuation system is failing because access to information has never been easier for collectors. There is a democratization of the coin market happening and it is driving down prices. Collectors have realized it is considerably cheaper to buy coins from fellow collectors, thus instilling the mindset that numismatics has become a buyers market. Collectors are beginning to set the value of coins, instead of dealers.

It's a mixed bag. The declining prices are great for new collectors and absolutely horrible for long-time collectors. There are numismatists out there whose collections have probably lost 50% of their value because the old system is wearing down. And that sucks. I mean, there's no other way to say it. It straight up sucks. Coins were supposed to be this safe investment, as long as you bought high grades with low populations, and now those people are seeing that it was all just smoke and mirrors. For the most part, anyway. The coins still have value, just not nearly as much, in some cases. And, in a large part, it is the TPGs and certified dealers who are to blame. They had to control the market with artificial pricing and populations that were not a reflection of reality. Which brings me to my next point...

Condition Rarities

Assigning a higher value to a coin because it has a high grade not often given to coins of that type, year, and mint mark, and then recording that number in a way that can only increase, is not a good system. In the article Salzberg uses the 1939-S Washington Cent in MS-67 as an example. The population jumped from 21 to 80 over five years. That kind of thing could be accomplished by one stubborn person resubmitting the same coin over and over in hopes of getting upgraded to an MS-68, which would have a population of 1 and thus be very valuable as a "condition rarity". More likely, it was a combination of resubmissions and lower grading standards that resulted in the higher population. Maybe some of the 42 NGC pieces were cracked out and submitted to PCGS in hopes of getting an MS-68. It's impossible to know.

As illustrated above, condition rarities are, like all things involving TPG population reports, not based in reality. They are especially shaky investments because TPGs can change their standards whenever they choose.

My advice is to base your purchasing decisions on mintage numbers. Those are pretty solid. Why pay a premium for an artificial TPG population number, when the actual mintage numbers are available?


L Free said...

Condition rarities are a fantasy most of the time. If your are top pop with just 1 of 2, let's say in ms67 and in ms66 there are 8 total, then there is less risk of many more coins grading ms67 or even one reaching ms68. This has a strong value and long term increase in value. BUT if top pop is 1of4 in ms67 AND in ms66 there are a total of 30. The risk of population growth in ms67 or even and ms68 joining the population is more likely.A much higher investment risk. So more a #2 pop coin will lower the values of top pops regardless of top pop #s.The internet is knowledge.Slabs provide this information therefore if Mr Salzberg's article is true there is nothing he can do to stop this trend until the slab companies are out of buisness.L

Information For ALL US Coin Collectors said...

The truth can only me ascertained by studying how many coins of a particular type and condition grade actually sell on the market. Population reports are not a good indicator of availability; as you pointed out. I just think there's so many conflicts of interest with all the TPGS, they have their own price guides and dealers and the companies are public and must please investors with profit margins. It has created a bit of an artificial market that could fall if certain things happened at the wrong or right time, depending on which side of the fence you stand.