A 30-Year Evolution of the Coin Market, and a Look Forward
By John Feigenbaum – David Lawrence Rare Coins :
In March of this year I will turn 42 years old and it occurs to me that 2011 marks my 21st year as a full-time coin dealer. So, exactly half of my life has been devoted to professional numismatics, though I have been attending and setting up at shows since I was 5 years old. It’s truly amazing how much the coin industry has changed over this time. Like many other markets, change was slow for the many decades prior to the 1980’s, and for many collectibles not always positive. But the past three decades have delivered a massive shift in the rare coin marketplace, and the dealers of long ago would be shocked to see how we trade today.
In this article, I will identify several major factors that have shaped the current coin market since 1980, and make some projections about the next decade.
Third party grading
For starters, 1986 was the year of the greatest change in this era – the modern concept of third party grading was born. PCGS was the first major player out of the chute, followed quickly by NGC. Both of these grading services are strong today and virtually without competition.
The benefits of third party grading are obvious and have been discussed many times over, however, but the often-overlooked miracle of this service wouldn’t become apparent until the late 1990’s (and early 2000’s) when the Internet would emerge as the preferred trading venue for buyers and sellers. Many other collectibles have failed miserably at keeping pace with rare coins because rare coins are so easy to buy and sell on the Internet.
Stamps, as an example, have faltered in recent years as a viable “investment-grade collectible” because the average stamp collector doesn’t want his/her stamp encapsulated – which leaves them vulnerable to future mishandling. Rare items are sold (as were coins prior to 1986) with paper certification. Because of the handling issue, collectors have an innate distrust of the “certs” and many stamps auctions are fraught with high return rates and stamps that don’t grade out. A definite barrier to value and liquidity!
In 2007, John Albanese, the original founder of NGC, formed a new service called Certified Acceptance Corporation. CAC applies a sticker of approval on PCGS and NGC coins that they consider worthy of inclusion in their sight-unseen purchase program. This secondary acceptance has been widely accepted by the dealer and collector community and provides an added layer of confidence, especially for Internet buyers.
Most recently, in 2010, PCGS announced several new, innovative measures as well. First, they announced a special “Secure” holder which tells consumers that coin has been digitally fingerprinted so future submissions of the coin can be matched up; second a “sniffer” which can detect the existence of foreign substances that have been artificially added to coins; and third a + grade designation for coins that are at the top 20% of the grade line.
These three innovations alone represent greater change than anything added in the 20 years prior. NGC has followed suit with the + grade, as well and while the + designation is still new, it’s safe to say that collectors are warming to the idea and coins with the + are worth more than those without. In some cases, a lot more.
Soon after the advent of third party grading, we saw the emergence of online coin trading networks, which allowed for a real-time exchange of dealer-to-dealer bidding for certified coins.
Suddenly, a true market started to exist outside of the traditional coin show events where most business had been handled. Even though numismatic trading networks don’t experience the volume of a traditional commodities exchange, the pricing information realized on these exchanges is very important.
One of the early exchanges to survive over this time is CCE (Certified Coin Exchange). Founded in 1990, CCE has “over 500 member and associate firms and $384 million dollars worth of bids.”1 CoinPlex, a newcomer to the coin exchange market, was officially launched in January 2011, and will offer other dynamic approaches to the coin exchange concept. As of this writing, a month before official launch, CoinPlex already had $284 million in active dealer bids.2 The good news is that the coin market is showing a level of financial depth not previously seen, and these sophisticated networks will go a long way to appealing to the larger financial institutions who are considering investment in rare coins.
One of the more amazing and intriguing life cycles we’ve seen in these 30 years has certainly been the coming and going and merging of the major live auction companies. In the 1980s there were many great auction firms like Stacks, Bowers & Merena, Heritage, Superior, Rarcoa, Mid-American and so on. As of this writing, we are effectively down to just 3 major companies (Heritage, Stacks-Bowers, & Goldberg). Heritage has become the dominant force in live rare coin auctions with around $500 million a year in numismatic-based revenue and a merger of Bowers & Merena and Stacks was just announced in December 2010. Goldberg is a distant third.
We can make a strong case that that coin market is much larger than it was in 1980 – perhaps as large as $4-5 billion, as estimated by John Albanese, President of CAC. Live auctions are unquestionably a very important part of the market, yet we’re down to just 3 major players.3
What could possibly explain this consolidation??? For starters, Heritage has done a tremendous job at taking the lead position. They have held consistent management since their founding in 1976 and continue to innovate. The new Stacks-Bowers has now been formed to compete more effectively with Heritage. As a strong believer in free markets, this competition will be good for the industry, as both companies will be fighting for market share.
Sure, the Internet has been an obvious game-changer for most sectors of the economy (shopping, electronics, books, etc), but this is also where the coin industry has benefited the most. Thanks to the prior establishment of reliable third-party grading companies, the Internet quickly became a major catalyst for growth in coin collecting in the late-1990’s and 2000’s. Dealers all over the county could now make new customers at an unprecedented rate without travelling to shows. Heritage alone boasts an email list of 567,929 registered bidders!
The first company to demonstrate the power of selling collectibles on the Internet was eBay. The legend of eBay is that Pierre Omidyar started the company to sell his wife’s Pez dispenser collection. True or not, the company started with collectibles and has now ballooned into an online marketplace of $8.8 billion in revenue (that doesn’t account for prices realized, just fees!). eBay is famously tight-lipped about the revenues of the rare coin category, but one can speculate that they might rival the live coin auction houses.
Other specialty companies like Teletrade and my company, David Lawrence Rare Coins, are the two biggest players in online-auction space. Online-only auctions provide a service to a large segment of the coin collecting public. The average lot price for these web auctions tends to be lower than live auctions but this arena (including eBay) plays an important role in attracting new buyers, as well as catering to life-long collectors who enjoy the regular action.
Coin dealers & Coin Shows
Sadly, the innovations of the Internet have not been kind to the traditional coin shop owner. When I was a kid, there were coin shops in nearly every city in the country. Big cities, like New York, Miami, Los Angeles, Chicago all had many coin dealers and many regional coin shows to support them. Even before the Internet, coin shops were starting to become a relic of the numismatic past because collectors’ tastes were changing. But the Internet sped up the process.
Around 1990, the hobby was starting to show its age as the collector base was getting older and the next generation was turning to computers, or sports cards and the hobby was in serious decline. Dealers specializing in cheaper coins couldn’t cover rent, crime was (still is!) a big issue, and most locales simply couldn’t support a coin shop that catered to true collectors.
Likewise, regional shows have been in decline since their heyday era of the 1970s and 80s and national shows are beginning to show declines as well. As it turns out, the collector of today is too busy to make the time to attend a show downtown, especially when the convenience of the Internet makes shopping at one’s desk so very appealing. Dealers are also much friendlier to collectors online than in person. This is primarily a result of coin shows becoming largely wholesale environments. Collectors are welcome, but often they are not prepared to deal with dealers who are looking for fast-paced decisions from informed buyers. In the office, it’s much easier for dealers to accommodate.
One other observation I will make about coin shows in general is the lack of display effort made by the dealers. Coin shows are nothing like the big consumer events like Comdex (electronics), or other investment-style events where vendors spend a lot of money on fancy booths in an effort to impress buyers. I attended an International coin show in Berlin this past January and I was really impressed with the displays of the larger dealers who built extravagant (by U.S. dealers standards) booths. The annual Summer ANA show is something of an exception but typically only the world Mints set up with fancy booths. (Heritage, to their credit, does the best job of any dealer/auction company. I think the grading services could do more here.)
I think that the era of successful coin shows has probably peaked. A few major events will clearly survive (e.g. ANA, FUN, Baltimore, etc) but it’s now almost impossible to start a new show. What I really like are the trade-and-grade style events that are hosted by PCGS and NGC to a limited audience of invited guests. In these small venues, dealers and serious collectors are able to pack a lot of action in a few days without the huge warehouse coin-show feel.
The U.S. Mint & Modern Coinage
The announcement of the Statehood quarter program, now over 10 years old was, a seminal event for the hobby and invigorated our market unlike anything else in recent memory. The U.S. Mint finally showed signs of life with this program which was so successful that it ushered in a new era of coin design changes, like commemorative nickels, pennies, dollars and so on. The ultra high relief $50 gold coin of 2009 is the high water mark for this era.
Often overlooked, the U.S. Mint is most likely the biggest coin dealer in the world with staggering volume. In 2009, the Mint boasted numismatic sales of $440 million, plus an additional $1.7 billion (yes, billion!) in bullion-related sales.4 It’s impossible to know how they break these apart but many of the items they consider bullion (like silver and gold eagles) have a big crossover with collectors.
Despite the criticisms of some of the Mint issues, the new designs have inspired hundreds of thousands of new collectors and invigorated others. Many of these buyers have become serious players in the collector market.
As a result of these new issues, the modern coin market has emerged from non-existence to a significant part of the current collector coin market. PCGS and NGC realize a significant portion of their revenue from grading these coins.
This reality is controversial among the establishment of older coin dealers, but is an undeniable truth. It seems, many new collectors would prefer to build collections of MS and Proof 69-70 modern coins before they dabble into the older issues. Most dealers (myself included) thought the so-called modern market was a short-lived fad, but I now believe it is here to stay. Many modern coins in top grades sell for amazing prices, and the market is largely collector driven. Unlike classic coinage, very few wholesale transactions occur in the secondary modern coin marketplace, but this too will change in the coming years.
The Gold Rush & Institutional Investing
No conversation on the trend of the coin market would be complete without a discussion of the gold price surge of the past decade. The 30-year chart on gold is really flat from 1980-2000, but the period from 2000-present could just as well have been depicted with an image of a mountain — a steady rise from $300 to $1400! Now that we’re 10 years into this event, the talk of gold prices has reached fever pitch and even my mailman is giving me advice on gold buying. Is this a bubble, or the beginning of a steady run to $3000 gold? Either way, the excitement generated by this rise has been spilling over into the numismatic side of coins as institutional investors are interested in rare coins as hedge against inflationary fears, and general investing strategy.
To that end, it’s worth noting that there have been several ill-fated attempts at institutional investing in the rare coin business, but I believe the potential for a successful fund exists, and it will happen. Rare coins have proven themselves as worthy investments and many coins are now breaking the 7-figure mark. Investors are becoming increasingly comfortable with the idea of building portfolios, because the liquidity is so much greater than other collectibles.
As I write this article on the eve of a new year, it occurs to me that the U.S. rare coin market is surprisingly strong. Despite the overall weakness in the economy these past two years, collectors have not fled. We’ve seen as many newcomers as departures. Yes, levels are down somewhat from their peaks in 2008, but I see that as a healthy start for 2011.
Laura Sperber of Legend Numismatics worries “there aren’t enough great coins in the market to sustain the number of buyers looking for them.” I think she’s right, and the great rarities are impossible to replace right now. I also think that the larger economy of collectors is quite satisfied with the efficiencies in our market, and that bodes well for outside investment. Sperber also believes that the “rare coin market today dwarfs [the market of] 1980. She notes that there are over 350 $1 million coins now, where there were none in 1980.”
John Brush, Vice President of David Lawrence Rare Coins, opines “as many new buyers continue to join the ranks of coin collectors, even in a down economy, the value of “special coins” must continue to rise. And if the prices of precious metals continue to attract investors (institutional or private) to the coin industry, the field of numismatics will inevitably experience a continued growth cycle. The next focus should be for us to continue to take care of the younger collectors and espouse what we consider to be not only a great industry, but a great hobby.”
The coin industry has everything going for it…established, credible grading companies, wholesalers, dealers, auction companies, e-commerce and the U.S. Mint generating massive interest, along with daily headlines on gold values. The future looks awfully bright to me…
John Feigenbaum is President and owner of David Lawrence Rare Coins and a minority shareholder of CoinPlex. David Lawrence Rare Coins was founded in 1979 and currently offers two weekly Internet coin auctions, as well as direct sales through their web site at www.davidlawrence.com. John can be reached via email at: firstname.lastname@example.org.
Editors Note: John’s article featured on the cover of the March 11th, 2011 issue of “the Coin Dealer Newsletter”