10 MYTHS OF THE MODERN COIN MARKET

in Articles,Coins as Investments

10 MYTHS OF THE MODERN COIN MARKET

By SCOTT A. TRAVERS

COPYRIGHT © 1995, 2003 BY SCOTT A. TRAVERS
ALL RIGHTS RESERVED.

In an age when image is all-important, the word “modern” enjoys a high approval rating. Most people associate “modern” with progress and change for the better, as in the expression “modern conveniences.”

Thus, when hobbyists think about or talk about the modern coin market, they tend to focus on latter-day developments that make it more convenient to buy and sell rare coins–computers and computer networks, for example, that make their coin transactions quicker, easier and more efficient.

There isn’t any doubt that computers and other modern innovations have had a dramatic impact on the coin market. Independent third-party certification is yet another development that has changed the way people buy, sell and hold rare coins, to cite just one more example.

At the same time, however, advances in knowledge aren’t always accompanied by corresponding quantum leaps in wisdom. Often, in fact, technological breakthroughs actually give rise to new misconceptions–so that modern-day advantages end up being compromised by myths and old wives’ tales more suited to the Dark Ages than they are to an Age of Enlightenment.

We’ve seen a marvelous marriage of coins and computers, but that union has given birth to maddening misinformation. So, too, has the “slab revolution.” And this worrisome downside is threatening to undo some of the good that these modern advances have wrought.

In order to combat misconceptions, we first have to separate fact from fiction. Knowledge of the truth is the first step in the process of gaining wisdom.

With that in mind, I’ve drawn up a list of the top 10 myths in the modern rare-coin marketplace.

Myth No. 1: Most certified coins trade sight-unseen.

With the advent of the slab and the establishment of the Certified Coin Exchange (CCE), an illusion was created that coins independently certified and encapsulated by either the Numismatic Guaranty Corporation of America (NGC), the Professional Coin Grading Service (PCGS) or ANACS all trade fluidly on the Certified Coin Exchange.

Certain generic, fungible coins (coins that are considered interchangeable) do trade in this fashion; common- date Mint State-65 Morgan silver dollars and Walking Liberty half dollars, for example, tend to be commoditized and often change hands sight-unseen. But, for the most part, beauty is still in the eye of the beholder, and most certified coins trade on a sight-seen basis.

A numerical grading system doesn’t take the place of personal taste, and most collectors buying coins demand to see them first. Dealers are no different–and, as shrewd businessmen, they recognize that it pays to show off their merchandise when it’s attractive. A sight-unseen offer represents an offer for coins of the lowest common denominator in a given grade, not for coins a cut above the rest.

Myth No. 2: Toning is to silver coins what rust is to iron.

This unfortunate–and potentially harmful–myth has been perpetrated, and perpetuated, by self-styled experts on coin chemistry. They equate the beautiful toning on lovely silver coins with the unsightly rusting of iron, and warn collectors not to buy toned silver coins because they are “damaged.”

Such warnings are not only baseless but also potentially hazardous to hobbyists’ financial well-being. They might well induce collectors who already own toned coins to “dip” those coins in a mild acidic solution to remove the layer of toning (and thereby presumably halt any further “damage”). In point of fact, however, beautifully toned coins are widely–and correctly–perceived to be natural and desirable, while dipped coins are the ones that have suffered surface damage, losing not only their luster but sometimes even part of their value. Thus, in warning about a problem that doesn’t even exist, the alarmists could be creating a very real one.

The process that causes silver coins to tone or tarnish is altogether different from the one that causes iron to rust. What’s more, the results are very different, too.

My father is a chemical engineer with a master’s degree from the Massachusetts Institute of Technology, and he has carried out extensive studies on this subject. Here’s what he has to say:

“When moisture reacts with iron, there is an all-out destructive attack of the metal. However, silver is relatively inactive and does not react with oxygen in the air, even at high temperatures. It reacts with certain chemical compounds, notably those containing sulfur, if a catalyst is present–moisture, for example. But even then, the reaction stops short of an all-out destructive attack. In the case of silver coins, the sulfur causes a coating to form on the surface of the metal–but far from being destructive, this coating is actually protective. If it develops quickly and tends to be unsightly, we call it tarnish; if it happens more slowly and attractively, we call it toning.

“Unlike iron, which loses metal when it rusts, silver is not eaten away–that is to say, corroded–by this limited chemical reaction. When iron rusts, it spalls and loses metal; when silver tones or tarnishes, there is no loss of metal.”

Myth No. 3: Certification services grade coins by computer.

A few years ago, with much fanfare and hoopla, the Professional Coin Grading Service introduced The Expert, a computer which, according to claims in PCGS literature, would be able to grade coins accurately on a systematic basis. Initially, it was programmed exclusively to grade Morgan dollars. But after just a year or so of service, The Expert was “temporarily” retired, and the Irvine, California, certification service now grades coins strictly by means of human experts’ eyes, not by computer.

Myth No. 4: Slab coin holders are vacuum-sealed and contain no air.

For the most part, coins that are encapsulated by grading services are sonically sealed, not vacuum-sealed. According to NGC’s founder, John Albanese, sonic sealing is accomplished by using high-pitched sounds which convert their energy into heat to fuse the two halves of a hard plastic slab together as one. In order to vacuum-seal a coin in a plastic holder, Albanese says, it would be necessary to press the plastic right up against the coin, much as the plastic wrapping is pressed against a frozen turkey in a supermarket. And this, he says, would damage the coin. Thus, for the most part, slabs are airtight but not air-free.

Myth No. 5: A rare coin’s value is directly proportional to its population.

With the introduction of population and census reports by the certification services, we’ve seen greatly increased reliance on the data revealed by these reports. Clearly, this information is highly useful. Just as clearly, though, many people are blinded by the numbers in these reports and think they never lie. Well, often the numbers do lie.

Many factors determine the value of a coin, and the number in a population report is just one of them. It’s helpful, of course, to know how many examples of that particular coin have been certified in that particular grade, and this is what we get from a population or census report. But other factors also come into play: the number of pieces available that haven’t been certified, for example, and the number of collectors who are interested in that particular series. Then again, far from indicating great rarity, a low population actually might reflect extreme commonness: A high- mintage modern coin, for instance, might have a low population in one of these reports simply because hardly anyone has bothered to submit any pieces for certification. Having little or no premium value, they aren’t worth the bother and expense of being certified.

Myth No. 6: Population reports can be relied upon 100 percent.

Population reports are imperfect reflections of rarity. People often crack coins out of holders and resubmit them in search of a higher grade–and each time the same coin is resubmitted, the population report counts it as a new submission.

It’s perfectly understandable why many coins are resubmitted, for small deviations in grade often result in great variations in price. Let’s say you have a magnificent Morgan dollar that’s beaming with luster, but a certification service sends it back to you with a grade of just Mint State- 64 because of a tiny scratch on the reverse. And let’s say that coin is worth $200 in MS-64 and $1,000 in MS-65. You’d probably crack it out of that MS-64 holder and resubmit it in hopes of getting a grade of 65. And if that coin was worth $10,000 in MS-65, rather than just $1,000, you might submit it a dozen times or more in your attempt to get it upgraded.

All this makes perfect sense from the standpoint of the person submitting a coin to a grading service. It doesn’t make sense at all, though, to rely upon the resulting population or census report as an accurate and infallible barometer of that coin’s true rarity. All too often, resubmissions skew population reports–sometimes quite dramatically.

Myth No. 7: The American Numismatic Association needs to spend large sums of money distributing educational material.

Recently, the national coin club has explored new ways to promote the hobby by self-publishing educational materials. The objective of such ventures is certainly laudable; the hobby in general and the ANA in particular both need a shot in the arm, and these might help provide it. But self-publication would be a needless expense. A far better approach would be for the ANA to license professional publishers to distribute books, videos and other materials drawn from the association’s proprietary resources. My contacts in the publishing field tell me there would be considerable interest in such materials.

Instead of paying a printer or a CD-ROM company to self- publish its work, the ANA could generate substantial new income. And, just as important, its materials would receive broad, powerful dissemination, which undoubtedly would attract many new recruits to both the association and the hobby.

Myth No. 8: Gold coins are always a better investment than silver or nickel.

Many new collectors, as well as many investors entering the coin market, are convinced that all that glitters is indeed gold. They assume that being more valuable (at least in terms of face and intrinsic value), gold coins are inevitably more desirable as well.

In a way, this is understandable; gold has undeniable glamour and allure. But gold coins can go down in value just as surely as any other kind. Gold coins may outshine their silver and nickel counterparts visually–but from an investment standpoint, they’re just as prone as their poorer relations to turn in a lackluster performance.

Your best bet is to stick with the highest-quality coins you can afford, regardless of their metallic composition or intrinsic value. And you would almost certainly be much better off with a stunning rare-date MS-66 nickel three-cent piece–a coin that cost thousands of dollars in 1989 and is just a small fraction of that today–than with a beat-up gold coin whose nicks and scratches make it appear that Godzilla used it as a teething ring.

Myth No. 9: Rare coins are traded on Wall Street.

Back in 1989 and 1990, Merrill Lynch and Kidder Peabody did in fact establish limited partnerships in rare coins. However, those partnerships have since been liquidated– largely because their performance was disastrous. Participants in the Merrill Lynch funds got all their money back from Merrill Lynch, but others were not so fortunate.

Beware of hucksters touting rare coins as an investment vehicle traded on Wall Street. It was true in 1990, but it’s false five years later.

Myth No. 10: Coins perform well only in inflationary times.

Inflation does enhance interest and activity in rare coins. We saw this in the late 1970s and early 1980s, when inflationary fears–and actual double-digit inflation– triggered a massive exodus from traditional investments into tangible assets, including coins. But another major coin- market boom, in the late 1980s, had little or nothing to do with inflation.

That boom–likewise one of the biggest we’ve ever seen– was touched off by Wall Street’s entry into the coin marketplace. It drew strength from the introduction of coins to many prospective buyers as a new form of investment, and from the ability of the coin industry to promote itself successfully. This demonstrates conclusively that while inflation is a big plus for the coin market, it isn’t an absolute prerequisite for a boom.

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