News and Analysis on scarce coins, coin markets, and the coin collecting community
by Greg Reynolds
Though auction prices are often cited as market prices, little has been written about the nature and meaning of auction prices and how these relate to market prices. I am not talking about bullion items or generic coins (like 1924 $20 coins or 1881-S Morgan Silver Dollars). I am referring to pre-1934 coins that are rare or at least very scarce. How do auction results for pre-1934 U.S. coins relate to market prices? Are auction prices market prices?
Before I begin to discuss the meaning of auction results, I refer to some previous columns and articles for the benefit of those who are unfamiliar with pre-1934 coins or with coin auctions.
I wrote a two part series on the reasons why 1933/34 is the true dividing line between classic and modern coinage (part 1: part 2). This is relevant as the auctioning of modern coins is a topic that is not addressed here. In addition, I focus upon the general reasons, in regards to the coins not to the bidders, as to why some coins realize strong prices at auction in two recent columns relating to a major auction; one column is on business strikes and the other relates to the Henry Miller collection.
Unlike in my auction reviews, the focus here is not on the quality or pedigree of individual coins. I wish to illuminate the objectives of bidders at auction, as such objectives relate directly to the issue of whether auction prices are market prices.
For those who have no idea what I am now talking about, please read my columns on Basics for Beginners, Collecting Modern Coins, and Advice for beginning and intermediate collectors of U.S. coins. (Remember links are in blue.) Before buying coins at auction, consult an expert, and think about the meaning of auction prices.
I. What Do Auction Prices Mean?
Kris Oyster of DGSE finds that “most auction prices are somewhere in the middle of wholesale prices and retail prices.” Similarly, Mark Feld, a longtime coin business veteran and an expert grader, states that “auction prices are a blend of wholesale and retail prices,” depending upon the motivation and knowledge of the respective bidders.
Often, not always, an auction price will be in the upper part of a wholesale price range or the lower part of a retail price range for the respective coin. I am referring to the selling of scarce or rare U.S. coins in major auctions. There are, though, auction prices that are in the lower part of a wholesale price range or even beyond a retail price range.
For a particular coin, two collectors, who are participating in an auction directly or through agents, may each be willing and able to pay double or even triple the value of equivalent coins, or even double the value of indisputably higher grade representatives of the same coin issue. In the future, I will write an article that provides examples of such events. How often do coins realize ‘above’ retail prices?
I (this writer) assert that auction prices are usually higher than the prices that dealers would be willing to pay in dealer-to-dealer transactions at coin shows, and lower than many of the prices set by dealers when coins are offered to collectors. It is important to keep in mind that, in a typical mail-order transaction, the collector has the option of returning a coin for a full refund, with no questions asked of the collector. Except in very unusual circumstances, auction purchases may not be returned. Therefore, it is logical that, all other factors being equal, a collector would be willing to pay more in a situation where he or she has a return privilege, or a chance to examine each coin before deciding whether to buy it. Of course, there are exceptions to this rule.
When extremely rare coins are sold at auction, on average, not always, these realize stronger prices than coins that are just not that distinctive. Consider, as examples, Capped Head Half Eagles ($5 coins) from the 1820s, U.S. Patterns, 1854-S $2½ gold coins, and extremely rare die varieties of Bust Dimes or early large cents. Are the markets for these defined by auction prices?
No, there are plenty of cases of extremely rare patterns, Capped Head Half Eagles or early large cent die varieties being purchased by dealers who, not long afterwards, sell such items to collectors for 5% to 40% over the respective auction prices. In some cases, the auction result for an extremely rare item will be a retail price and, in many other cases, it will be a wholesale price. It just does not make sense to consider auction prices realized in both categories to be “market prices” or ‘true values.’ Even for extremely rare items, auction prices may substantially differ from market prices.
In general, John Albanese strongly maintains that it is almost impossible to draw a conclusion about the meaning of most auction prices for scarce or rare coins. In 1987, Albanese was the sole founder of the NGC and, in 2007, he founded the CAC.
“Usually, you do not really know why a coin sells for a price at auction,” Albanese states. “It could have been in an old [PCGS or NGC] holder and be bought just to upgrade. A dealer who is getting his 5% commission may push a collector to buy a coin so the [dealer-agent] gets paid. A coin may also bring too low a price at auction if only wholesalers, not collectors or retailers, bid on it. I [John] do not rely on auction prices. Auction records are number four on my list of sources to price a coin.”
Similarly, Matt Kleinsteuber asserts that many auction prices are not reflective of market prices. He regards market prices for coins to be the prices that prevail in dealer-to-dealer transactions, which I (this writer) refer to as “wholesale.” Matt is the lead grader and trader for NFC coins. Every year, he is the successful bidder for millions of dollars worth of coins at auction.
At auctions, Kleinsteuber says, “some coins are beyond great bargains and some stuff brings ultimate dollar. [Indeed,] some coins bring way too much and others not nearly enough,” less than wholesale prices. “As an example,” Matt mentions that he buys “rainbow toned silver coins at auctions and then sells them two or three days later to other dealers for 50% more” than the auction prices realized. In other cases, “rainbow toned silver coins bring 100% more” than wholesale prices for such coins.
Like Albanese, Kleinsteuber does NOT rely on auction prices to value coins. “It is necessary to take many factors into consideration.” Plus, an auction price does “not mean much” by itself. “I [Matt] need to know what the coin looks like. Just knowing its [type, date and] certification is not enough.”
I (this writer) contend that auction prices are a little more meaningful than Albanese and Kleinsteuber suggest. I have been covering auctions of coins and other items for many years.
Analyzing auction prices is much more difficult than most collectors realize. Even so, through a proper analysis, auction prices can be shown to be very valuable pieces of information. While it is not practical to explain all aspects of auction analysis herein, I hope that my remarks shed considerable light on bidding activities at coin auctions and on some (not all) of the tools that should be employed to analyze prices realized. To even begin to understand auction results, it is necessary to consider the differences in objectives and strategies of bidders.
II. Collectors Buy for Their Collections
Often at auctions, collectors buy coins for their respective collections. When an auction lot sells directly to a collector, the price realized should be interpreted much differently from the auction result for a coin that is acquired by a wholesaler who stays in the shadows and does not wish to sell directly to collectors.
When a coin is acquired at auction by a wholesaler, the coin may eventually be sold by a telemarketer for a price that is 20% to 75% higher than the price the same coin realized at auction. Therefore, in the same auction, some coins will sell directly to collectors and others will eventually be sold to retail clients for 20% to 75% more than the auction results.
A substantial percentage of auctioned coins will eventually sell for prices in the range of 5% to 30% over their respective auction results. Even so, it just does not make sense to refer to both the auction price for a coin that a collector buys directly and the auction price for a coin that will soon be sold for 20% to 30% more as a “market price.”
Mark Feld raises the issue of dealers losing money on auction purchases, which I (this writer) know to be a common occurrence. If a dealer outbids a collector, and the dealer later loses money on the coin, Feld suggests that “the price paid might have been retail.”
Clearly, when more than one collector is seriously competing for a coin at auction, the result is likely to be a retail price for the coin. If zero collectors, or not ‘so serious’ collectors, bid on a coin, the auction result could still be a retail price.
III. Collectors Are Represented by Dealers
To acquire coins at auction, a collector may be represented by a dealer, who earns a fee, typically 5% of the hammer price. Such representation occurs often at major coin auctions. In my personal opinion, it would make sense for the collector and his representative to negotiate a different arrangement, which is not based upon a percentage of the price realized. Nevertheless, the standard fee for such a service always has been 5% of the hammer price of the coins that the collector actually buys.
The dealer-agent may either use a separate bidder number for a collector-client or the dealer-agent may just place his own purchases and those for his clients on one bidder number. So, in many cases, it is not apparent to other participants or even to the auction company that a dealer is representing a collector. Nonetheless, when dealer-agents are competing with collectors and/or other dealer-agents, the coins purchased are likely to sell for prices in the retail range.
IV. Dealer Bids on coins with a customer ‘in mind’
It is not unusual for a dealer to buy a coin at auction with a collector-customer in the dealer’s mind. In such a situation, the dealer is not certain that the collector ‘in mind’ will buy the coin, though, in most such cases, he figures that it is likely that the collector will do so. The collector may wish to examine each coin before making a final decision. In this category of auction bidding, the dealer-bidder is thus assuming more risk than a dealer would be if he was representing a collector for a 5% fee. So, in this situation, the dealer will probably offer the coin to the collector ‘in mind’ for 6% to 15% over the auction result.
In the event that the targeted collector does not buy the coin, the dealer will likely offer it to other collectors for 6% to 30% over the auction result, depending upon the nature of the coin and the relative strength of the particular auction result. If the dealer paid a retail or almost retail price for the coin at auction, then he may ‘end up’ selling it at a loss to another dealer. Indeed, it would not be rare for a dealer to incur a loss in such a situation.
So far, three kinds of collector-oriented bidding have been covered, collectors bidding for themselves, collectors bidding through agents, and collectors indirectly (and sometimes unknowingly) influencing the bidding by being in the minds of dealer-bidders. Bidding in all three of these categories will often push auction prices into the retail price range.
V. Dealers Buy To Upgrade
Though it pushes prices upward, the saddest and most harmful reason for a dealer to buy a coin at auction is to upgrade it. Uncirculated and Proof coins are graded on a scale from 60 to 70, and one grade increment can equate to a substantial or even tremendous increase in value. For extremely rare coins, a jump in a circulated grade, perhaps from VF-35 to EF-40 may also result in a marked increase in value.
If a coin that is PCGS or NGC certified as grading 65 is ‘cracked out’ and re-submitted, it may be awarded a 66 grade. Crackouts have been occurring since the PCGS was founded in 1986. The era of severe grade-inflation, roughly from 1997 to 2006, led to many coins being upgraded by one, two or even three grade increments. For example, it is not unusual for a gold rarity that formerly graded EF-40 to be certified as grading AU-53 now.
While the problems caused by grade-inflation are significant, coin doctoring is even worse. Over the last eighteen months, I have written a great deal on natural toning, dipping, doctoring, grade-inflation, crackouts, and related matters. Among other writings, please see my three part series (part 1; part 2) on collecting naturally toned coins, my article on dipping, doctoring and additions to the PCGS lawsuit, my argument for reforming the PCGS SecurePlus program, and my recent piece on the PCGS Coin Sniffer.
It is important to emphasize that most dealers who play the ‘crackout’ game lose money. Likewise, as I explained in June with the assistance of John Albanese, there are a fairly small number of coin doctors who can successfully deceive graders at the PCGS and the NGC. The point in this context is that when bidders are seeking to upgrade a coin that is being sold at auction, the price realized may not correspond to either a wholesale or a retail level relating to the PCGS or NGC certified grade of the coin in question. A coin that is certified as grading ‘64’ may be graded as ‘66’ by two bidders who seek to ‘upgrade’ it.
VI. Dealers Buy To Sell to Collectors
Curiously, many mainstream dealers (in rare U.S. coins) attain most of their inventories by way of buying coins at auction. By buying for inventory, I am referring to a situation where the dealer-buyer is seriously planning to sell his auction purchase for a profit within one year of purchasing it. When a dealer keeps a coin purchased at auction for more than one year, especially if he figures he is likely to do so, he really becomes a speculator or a collector in regard to the purchase of such a coin.
Generally, when a dealer buys at auction with the idea of selling to a collector in less than one year, he is a collector-oriented dealer who has knowledge of the demands of his customers and potential customers. Auction results that fall into this category are often in the upper reach of the wholesale range or even in the retail range if the collector-oriented dealer figures that he can pay a retail price and then charge a still higher retail price. Some dealers have an advanced understanding of the markets for particular kinds of coins and/or a strong clientele for such coins.
VII. Dealers Buy To Sell to Other Dealers
From the time that I started writing about coin auctions, this category of auction buyers has puzzled me. Although I maintain that the activities of coin doctors and even non-doctoring crackout artists are harmful to collectors and to the long-term health of coin markets, I have always understood their activities.
I am curious about the wholesalers who are not crackout artists and have no collector-customers. Indeed, most of them do not wish to even meet collectors. There are wholesalers who just plan to trade with other dealers. When these dealers buy coins at auction, it is usually true that the prices realized are at wholesale levels, or even below wholesale.
Are most auction results in wholesale price ranges? Yes, undoubtedly so, many collectors do not participate in auctions, or at least do not do so as often as they purchase coins privately.There are many collectors who wish to physically examine coins for themselves before deciding upon them. Furthermore, there are collectors who do not feel comfortable making the snap decisions that are required in an auction setting. Coin collectors often take a leisurely approach to acquisitions. Moreover, in many instances, collectors are persuaded by dealers to buy specific coins. The dynamics of auctions are different from the characteristics of private sales, in which collectors are often willing to pay more than pertinent auction results.
Is it possible to know the meaning of a specific auction price for a rare coin? Many clues are available to the collector who devotes a lot of time to researching coins. After auctions, many auction purchases can be seen at dealer-tables on bourse floors of shows and conventions.
How about the connection between auction prices and estimated values in price guides? Recently, I asked Laura Sperber about the usefulness of price guides. “There are NO accurate price guides,” she responded with emphasis upon the word ‘NO’! Regarding rare coins, I tend to agree. Some guides are more accurate than others for specific series and/or grade ranges.
Matching an auction price to a price guide value would not prove that both are accurate in such a case. It may be a consequence of two bidders employing incorrectly high price guide values to factor bids.
As for my own research and analysis, I find that some (not all) dealer-bidders and collector-bidders are happy to discuss their auction purchases and unsuccessful bids with me after the auction, sometimes a week later. Furthermore, I frequently talk to dealers about private transactions, and I sometimes report on them. To understand market prices, and the correlation between market prices and auction prices, I learn about private transactions, dealer asking prices and the availability of particular categories of coins.
There is no simple formula for analyzing auction prices. I hope that my discussion here contributes to an understanding of bidding behavior and auction phenomena. In many of my other columns and articles, I focus upon specific results.
For those who do not have an advanced understanding of coin markets, it is best to consult an expert before bidding on rare coins in an auction. Market prices for rare coins are not clearly identifiable.
©2011 Greg Reynolds