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Gradeflation hurts coin collectors

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Definition: grade inflation is the loosening of grading standards for the purpose of grading coins at a higher number on the 70 point ANA grading scale.

Some longtime collectors, who remember the days before coins were professionally graded or slabbed, have never been thrilled with the service. We have always suspected that the hobby would be ruined by investors and speculators who know nothing about coins and rely on self-appointed experts to find coins to invest in. We also have fretted about the integrity of the grading process. 

When the MS-65 Morgan silver dollar was first graded, it was promoted as an “investment grade” coin. Large quantities of Morgans were purchased by investors who had no appreciation of the beauty of the coins and only wanted them for the investment potential. The net result was that Morgans skyrocketed in price and the most beautiful of the coins became unaffordable to collectors of modest means.

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I didn’t earn enough money to acquire many coins until the early 1980s. By then, common date MS-65 Morgan dollars were selling for $300 a piece. In the mid 1970s, a collector could get the same coins for as little as $10 each. The promoters made oodles of money while the collector community was deprived of much of its best material.

In the early 1980s, it looked like investors were going to overrun the coin market and make every attractive coin unaffordable.  

Before the end of the 1980s, the price of the common date MS-65 Morgan dollar had fallen below $150 each. Prices languished for years, falling to about $100 for a time.

With the value of many coins increasing over the years, I was at a loss to understand why Morgan dollars lagged. The answer eventually became evident: over promotion to investors in the early 1980s, followed by grade inflation propagated by the grading services. 

The grading services contributed to the drop in value of common MS-65s by lowering their grading standards, which enabled many more Morgans to qualify for the “investor” grade. 

Coins previously graded MS-64 could be broken out of slabs and regraded as MS-65. The law of supply and demand accounts for the drop in values. Investors couldn’t soak up all of the newly graded MS-65s, so prices dropped toward levels previously held by the MS-64s before grade inflation.

In 2010, common date MS-65s sold for around $150, which is still less than what MS-65s sold for in the early 1980s. To have the same value and quality as the MS-65s of the early 1980s, the coin must now be slabbed as an MS-66 from a grading service with the most conservative standards. Some less conservative services have graded Morgan dollars as high as MS-68 for coins that don’t even meet the MS-63 standards of more conservative services.

None of the professional coin grading services grade as conservatively as they did in the early 1980s. Some grade AU coins as Mint State.

I have heard rumors that some grading services bend their standards for friends and preferred customers. This means that the grade your coin receives depends on who you are. While many rumors are untrue, some contain an element of truth.

If you ran a grading service and a very good customer demanded a coin be assigned a higher grade, what would you do? “Grade inflation” is the easy way to be accomodating. Just change the standards and nobody is doing anything wrong except harming all those who previously had coins graded by your service. Plus, it generates more business as folks scramble to have their coins regraded and slabbed at a higher grade. Plus, telemarketers now have more “investment grade” coins to sell.

In reviewing this history, one has to wonder how a large number of business persons within the hobby have kept from being indicted for fraud or how the industry has avoided government regulation. 

Looking at the number of coins overgraded (and counterfeit) that are for sale in online coin auctions and at coin shows, one may have concern about the future of the hobby. A business that lacks integrity eventually lacks customers.

Further grade inflation is possible, especially if the hobby changes to a 100 point grading system from the current 70. Imagine how much an MS-99 will be worth. Plus, with a new system, all the existing slabs will need to be regraded. Look at the profit potential for the grading services!

This Viewpoint was written by Bruce R. Frohman, a hobbyist from Modesto, Calif. Viewpoint is a forum for the expression of opinion on numismatic subjects. The opinions expressed here are not necessarily those of Numismatic News. To have your opinion considered for Viewpoint, write to David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Send e-mail to david.harper@fwmedia.com.

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