THE UNSPOKEN TRUTH ABOUT RARE COIN AUCTIONS

in Articles,Coin Auctions

By SCOTT A. TRAVERS

Public auctions have long played a vital role in the sale of collectible coins–particularly coins of great value. This role was underscored recently when ultra-high-relief Saint-Gaudens double eagles brought strong six-figure prices at two different major auctions.

Out of needless fear or ignorance, however, many collectors tend to view auctions with suspicion, looking upon them not as opportunities but as traps. They worry that if they attended one, they might end up inadvertently buying a coin they didn’t want–simply because they raised their hand accidentally or sneezed or scratched their nose at the wrong time.

The danger of such mistakes has been magnified through the years by humorous vignettes in the movies and on TV. They seldom happen in practice and are rectified immediately when they do.

Once they overcome this unreasonable fear, collectors soon discover that auctions are replete with golden (and silver and base-metal) opportunities for obtaining exceptional coins–or, conversely, for selling one’s coins advantageously.

It’s true that “auction fever” sometimes grips a gallery and propels bidding levels beyond the real value of certain coins. This, of course, is a plus if you happen to be the person who consigned those coins for sale, but something to be avoided if you’re a buyer.

There are easy, effective ways, though, to guard against being infected with auction fever. And once you become familiar with auctions’ idiosyncracies, there are ways to turn these sales to your advantage.

At the outset, it should be understood that the information contained in this article pertains only to auctions conducted by reputable firms.

The first thing to determine when considering public auctions is whether you should buy at an auction at all–or, on the other hand, whether you should sell your coins in this manner.

Auctions are ideal venues for buying and selling certain kinds of coins, but totally unsuited for other types. To cite one outstanding example, auctions are a perfect place to buy and sell truly rare coins–especially those assembled into first-rate collections. The publicity surrounding important auctions, the time that elapses before such sales take place, the eye-catching catalogs that typically are distributed–all these factors combine to build increasing interest, attract potential buyers and stimulate spirited bidding for genuine rarities.

Naturally, such interest helps drive prices higher– which makes it clear why people holding such material often choose to disperse it at public auction.

But buyers benefit, too. They have the reassurance that other informed collectors were willing to pay very nearly as much to acquire those coins. They have the prestige of possessing rare coins with a pedigree–an intangible that can translate into added value later when they sell them. And often, the publicity surrounding major auctions will bring successful bidders offers to resell the coins immediately for a handsome profit.

Here are some examples of other coins that represent potentially good buys at public auctions:

Coins that come up for sale early in the morning or very late at night. Blockbuster auctions sometimes contain many hundreds of lots, requiring the auction company to schedule bidding sessions that start very early in the morning or run very late at night. Rival bidders may miss such sessions, making it easier for you to pick up bargains.

Coins that are offered for sale during a period of extreme heat or cold. The weather can work to your advantage. If there is a heat wave or the sale is taking place in the teeth of a raging snowstorm, fewer potential bidders will be on hand, increasing the odds in your favor.

Coins sold during downturns in the marketplace. Even auction fever can be blunted when the coin market is depressed. Since auctions tend to attract scarcer and more desirable material than other methods of dispersal, this can give you the chance to buy some truly exceptional coins for prices that are really quite reasonable.

Group lots. First-magnitude rare coins get suitably star billing at public auctions. Often, however, parts of the supporting cast end up being lumped into group lots. That’s because time constraints don’t permit the sale of each and every coin as a separate lot. Much of the material found in group lots may be of no special distinction, but now and then scarcer coins find their way into these groups and you can pick them up–as part of the groups, of course–for common- date prices.

On the other side of the equation, there also are certain coins that you should avoid buying at public auctions, or check out very carefully before making a bid. You should be wary, for instance, about auction coins that have not been certified independently by one of the leading coin-grading services.

In my book The Coin Collector’s Survival Manual™, David Hall, founder and president of the Professional Coin Grading Service, estimated that 50 percent or more of the uncertified coins appearing at auction have been tampered with in some way–doctored or altered. That’s food for serious thought. Now let’s examine some strategies you should consider when you buy coins at public auction.

The first thing to consider is where you should sit in the gallery. Some people like to sit in the back, where they can see who’s bidding and where they can bid freely without being seen themselves by most of the other bidders in the room. Other people like to sit in the front row, so they can bid discreetly on the lots of their choice by giving the auctioneer a subtle signal.

Where you sit is largely a matter of comfort and style, though either the very back or the very front of the room can be strategically advantageous.

Wherever you sit, I strongly recommend that you figure in advance the maximum amount you’re willing to bid for each and every coin in which you’re interested.

Set limits as to how much you will pay. Calculate these to the cent. And don’t budge one cent from that calculation. Don’t have a ballpark figure just in your mind, figuring you’ll attend the sale and see what everyone else is doing. If you do that, you’ll overpay.

Now that you have a basic idea of what to buy at auction–as well as what not to buy–and when and how to buy it, we come to an aspect that most people don’t even consider: the coins that you should, and should not, be selling at public auctions.

Let’s start by considering the coins you should not be selling at auction. Simply stated, you should not be selling generic or bullion-type coins.

First of all, the commissions charged by auction firms would eat up too much money. Dealers who make markets in bullion or generic coins often work on a margin of just a few percentage points. If you consigned such coins for sale at auction, though, you’d end up paying a commission of up to 20 percent. And you can be reasonably certain that the prices realized by those bullion coins or generic coins at an auction would not exceed what market-makers are willing to pay for them–and what they advertise publicly to pay for them.

Let’s take, for example, a Krugerrand. If you were to sell a Krugerrand to a local dealer when bullion gold was at $360 an ounce, he would pay $360 minus about 2 percent, so you would end up with $352.80.

If you consigned that Krugerrand to an auction, you would get $360 less the auction commission of 20 percent–so you would end up with $288. Plus, you would have the marketplace risk–the risk that gold bullion could go down in value dramatically between the time you consigned your Krugerrand and the time it was sold at auction.

When you sell to a dealer directly for 2 percent less than the spot price of gold, you have immediate control; you can time your sale and use your best judgment in deciding when to sell. When you sell at auction, you’re at the mercy of the marketplace–and with something as volatile as bullion-related coins, that risk can be substantial. The same logic applies to generic coins–which, while they may have a certain amount of value as collectibles, also are tied importantly to the value of the bullion they contain.

These, then, are the coins you should not sell at public auction. What should you be selling at auction? Almost everything else. Rare coins. Scarce coins. Coins with questionable toning. Scratched coins. Worn coins. Major rarities. Semi-classic rarities. Just about everything else. In The Coin Collector’s Survival Manual™, I quote an executive of a leading coin auction company as saying that coin auctions are weighted in favor of the consignor. In other words, auction companies have a tendency to view the consignor, not the buyer, as their ultimate customer. This has been reflected in recent years by the trend toward shifting more of the burden of underwriting auctions’ costs from the sellers, or consignors, to the buyers.

Let’s take a look at how auctions are conducted–their mechanics. This is a subject rarely discussed, and I do so from a perspective that is unique, for I not only buy and sell coins at auctions for my clients but also am a licensed auctioneer. My firm conducts private bidding competitions known as lightning sales, which are not really auctions but incorporate some of the features of auction sales.

The nucleus of a public auction–the centerpiece of the sale, from the auctioneer’s standpoint–is “the book,” the list of bids obtained before the sale from people who can’t or won’t attend. With a successful book, an auction firm almost doesn’t need to have people physically present at the sale.

People in the room are told that bidding will open at a small increment over the second-highest book bid. And reputable auctioneers scrupulously adhere to this rule. Let’s say that on a certain lot, before the auction begins, there are only two bids–one for $500 and the other for $5,000. These book bids form the basis for the start of the public bidding.

In this particular case, the bidding might open at $550–10 percent more than the second-highest book bid, which is $500. If no one on the floor is willing to bid more money, then the person who bid $5,000 will get this coin for $550. This kind of disparity between the two top book bids isn’t likely to happen in practice; theoretically, however, it could. And knowing this, some people are too liberal with their book bids. This can have costly consequences. Let’s say two different people take this approach on the same coin, and both bid about $5,000. In that case, bidding would probably open at about $5,500–10 percent more than $5,000–and both of these bidders would be stunned.

The lesson is to use proper caution in submitting a book bid, and not to offer more than you would if you were in the room.

When consigning coins to an auction house, astute sellers insist that the firm maximize both the coins’ presentation in its catalog and the grades it assigns to them.

A few years ago, “maximizing the grade” meant asking the auction house to assign high grades in the catalog. Now, astute sellers seek instead to have the coins submitted to the grading service that will assign the highest grades to them.

The old adage used to be, “If you don’t know your coin, know your dealer.” That has now been modified to state: “If you don’t know your coin, know your grading service.” Typically, the auction firm charges a commission to both the consignor and the buyer of each coin. From the seller’s standpoint, however, this is negotiable, and sellers with good negotiating skills can obtain advantageous terms. I use my own negotiating skills to good advantage in obtaining auction contracts for my clients.

Often, I receive my compensation directly from the auction house, and the compensation is tied to a percentage of the prices realized. For that reason, I’m in the same corner as my clients, pushing to maximize how much their coins realize.

You should keep in mind, however, that you won’t necessarily come out farther ahead on every coin just because you’re paying an advantageous commission. That’s because savvy buyers take the commission structure into account. Let’s say one auction company charges buyers 10 percent of the hammer price on every coin sold and also charges the sellers 10 percent. And another auction company charges buyers 15 percent and sellers 5 percent.

Smart buyers factor the 10 or 15 percent into the price they’re willing to pay. If they’re willing to pay $1,000 for a coin, they’ll just bid less on it if they’re paying a 15- percent buyer’s fee and they’ll pay a little more if they’re paying 5 percent. The bottom line for them is still going to be $1,000.

The moral of the story is not to think you automatically have a better deal with an auction house that charges you a 5-percent seller’s fee than you would have had with a firm that wanted to charge you a 10-percent fee. The auction house ends up with the same commission for itself, and you may well end up with a check for the same amount of money.

Buying and selling coins at public auction can be a rewarding experience in more ways than one. It’s exciting and enjoyable, and often witnesses moments of both high drama and very high monetary stakes.

Knowing the tricks of the trade can add to both your pleasure and your profit.

And that’s a combination that’s hard to beat.

COPYRIGHT © 1997, 2003, 2007 BY SCOTT A. TRAVERS
ALL RIGHTS RESERVED.

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