Every coin except the great rarities has a Terminal Point
By Charles Morgan and Hubert Walker …..
Charles and Hubert’s column Market Whimsy, which originally appeared in the American Numismatic Association (ANA) magazine The Numismatist, won the 2016 Numismatic Literary Guild’s award for Best Column, Non-Profit Large Publications.
This article consists of two columns that were first published February-March, 2015: “What’s Your Point?” and “Approaching Terminus?”, respectively. It has been updated where necessary.
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Conventional wisdom (and marketing) says that third-party certification raises the value of a coin, and that may be true… to a point.
No, literally – it’s called “Terminal Point”. And despite the morbid-sounding nomenclature, it’s actually a handy little tool that can save you money. It might take some analysis but the concept’s not complicated.
So on that note, an interesting ad showed up in our mailboxes. It featured two images of the exact same Morgan dollar–specifically, an 1881-S.
In the first picture, the coin was presented “raw”. Beneath it was the caption “Ungraded Value $178”. In the second, the coin was in a premium holder, graded MS-67+.
Now, instead of being worth a measly $178 (as described in the first image), the caption said that the coin in the holder sold at auction for $1,645 U.S. dollars!
Being sticklers for facts, we dug around to see if such a coin actually sold for that amount. Without too much trouble, we found a January 2013 Heritage auction that supported the ad’s claim. And while the coin in the auction was not the identical MS-67+ coin pictured in the ad, we can verify that such a sale took place.
Does that happen every time you submit your coins to a third-party grading service? Of course not. But a closer look at the numbers is revealing.
According to Professional Coin Grading Service (PCGS), there have been 207 grading events of the 1881-S Morgan dollar where the result was a grade of MS-67+ (we say “grading events” instead of “coins” because the same coin can be re-submitted (and graded) over and over again). They report 151 at MS-68, nine at MS-68+ and–mirable dictu–two at MS-69. This means there were 369 grading events where a coin was submitted that could realize $1,600 or more by being certified by PCGS.
However, when we originally researched the issue back in 2014, the pop reports were a little different: 106 grading events for MS-67+, 112 at MS-68, two at MS-68+ and two at MS-69.
Numismatic Guaranty Corporation (NGC) population reports reveal more of the same: 130 pieces at MS-67+, 248 at MS-68 and three at MS-68+ – for a total of 381 grading events where the result of submission could yield a coin valued at $1,645 or greater. The last time we looked into it, there were 100 at MS-67+, 218 at MS68, and two at MS-68+, for a total of 320 grading events.
With a purchase price of $168 plus submission fees, the submitter needs to sell the coin for more than $200 to break even. Using $200 as the target value then, the coin would have to grade MS-65+ or better. To date, PCGS has reported 16,601 grading events of 1881-S Morgans in grades MS-65+ through MS-67. NGC’s reported figure is slightly higher at 21,819.
Add to that PCGS’ 369 grading events in MS-67+ through MS-69 and NGC’s 381, and you’ve got a total of 39,170. That’s roughly 8% of the total certified population.
In other words, if you pay $168 for a raw 1881-S Morgan, then you have about a 92% chance of losing money when you submit it to a third-party grading company.
Clearly, not every raw 1881-S Morgan dollar will cost $168. The going rate for a generic, low-Mint-State 1881-S Morgan in uncirculated condition is somewhere around $35 to $40, according to several dealers that spoke with us. “And even then,” one told us, “the coins you’ll find at that price aren’t worth grading anyway. Most will come back in Genuine holders, labelled as ‘cleaned’.”
Neither service states the number of ungradable coins they see, but we know that PCGS reports 80,594 grading events at MS-63 and under, while NGC reports 63,673. This means that at least 29% of all grading events for this issue are at this level or below.
At MS-64, PCGS reports 100,317 grading events; NGC reports 101,677. This is by far the most common outcome when submitting an uncirculated 1881-S Morgan dollar, and it indicates to us that professional dealers, who submit a majority of the coins graded by the services, are keenly aware of the drop-off in profitability that occurs at Terminal Point.
The MS-64 coin carries a market price of around $90 to $110, maybe more if the coin is especially nice. The MS-63, on the other hand, carries a market price of around $50 to $60. Given the economics of coin acquisition and submission fees, that’s a less-than-optimal outcome.
And that, in a nutshell, is what makes MS-63 the “Terminal Point” for 1881-S Morgan silver dollars. It’s the highest grade where the costs of submitting an 1881-S Morgan for third-party certification are greater than what it sells for.
Keep in mind, it doesn’t really matter what coin we use an example. Every coin (except the great rarities) has a Terminal Point. For all intents and purposes, coins graded at their Terminal Point or lower are dead in the certified coin market. That’s why it’s called Terminal Point, get it? Ah, where would the hobby be without puns?
For you fans of Economics and/or hieroglyphics, here’s a nifty formula:
Transcribed into English, it states that Terminal Point (T) is the highest grade (G) for an issue where the total cost of acquisition plus certification fees (C) is higher than the price it’s likely to realize when offered on the market (Realized Price, or RP). The second inequality is simply a test to make sure the grade in question really is the highest grade that meets the criterion for Terminal Point.
Breaking it down for an 1881-S Morgan, we get:
Terminal Point is MS63, if and only if the $40 acquisition cost for an MS-63 plus the $20 certification fee is greater than the $50 to $60 realized price range and an MS-64 for the same coin (with the same $60 total cost) is less than the current MS-64 $90 to $110 realized price range. Seems about right.
At any rate, we encourage you to try this out on the coins you collect. We bet you’ll start seeing Terminal Points everywhere. But we’ve got one more example for you*…
American Silver Eagle
Terminal Point is a concept that identifies the highest certified grade for a coin where the total cost of acquisition plus fees is higher than the coin is worth. This grade varies from issue to issue, but a thorough analysis of the coin market using terminal point would reveal that the number of classic coins that remain ungraded–yet financially viable–is in constant decline.
Given this fact, a substantial effort has been undertaken to move third-party certification into the realm of modern and postmodern coins [see also “The End of the Modern Era of United States Coinage”, The Numismatist, June 2013 —CoinWeek].
Among the coins of this era, none approaches the success of the certified American Silver Eagle.
NGC and PCGS combined have graded almost 10.6 million Silver Eagle bullion coins, according to population data made available by both companies on their websites. To put that number into perspective, consider that you could put every single American Silver Eagle proof coin produced from 1986 through 2000 in a certified holder and still have approximately 400,000 coins left over.
10.6 million perfect or nearly perfect coins from the same series in sonically-sealed holders is a lot. For all intents and purposes, it’s a mega-hoard of biblical proportions and a firm guarantee that none of these coins–not even the vaunted 1995-W Proof–will ever be rare.
Hundreds of thousands more of these coins are shipped from the U.S. Mint to the grading services every year, and on out to many of the industry’s savviest and most knowledgeable marketmakers. Yet these dealers and wholesalers manage to remain successful in the Silver Eagle market despite the existence of this decentralized hoard. Could they do so without some kind of empirical knowledge of Terminal Point? The evidence, written in black and white across 29 years of population data, suggests not.
The first significant grade to disappear from the population reports was MS-68**. Lower-graded coins exist–and continue to be made–but at levels below 68, the populations are statistically insignificant. The coins that earned these grades can best be described as submitter mistakes.
At the MS-68 level, a coin is generally attractive but has notable issues, albeit slight ones. From 1986 through 2003, both grading services could be counted on to grade between several hundred to a few thousand Eagles in 68. The majority of the coins certified during this period were a notch better, at MS-69. A small number of coins earned a 70. Through the beginning of the millennium, grading policies at PCGS kept the number of 70s to just a handful per date, and in many instances no coins earned the highest grade. NGC’s population reports for MS-70 vary from year to year, but 100 per year is typical.
By 2005, the situation changed. Bulk certification had arrived, and with it came massive submissions with minimum grade requirements. These requirements reduced, or outright eliminated, the variability of outcomes for large scale submitters. As a result, MS-68–an unprofitable grade–disappeared, and virtually every Silver Eagle certified by the two services earned MS-69 or better.
As submissions continued to increase, pressure was brought to bear on Mint State and Proof 69s as well. Coins in these grades became only marginally profitable. That and the fact that the Mint has the ability to regularly produce perfect or near-perfect Silver Eagles has doomed 69s.
Now 70 is the only profitable grade for coins in the American Silver Eagle series. Where can the market go from there?
In essence, the certified American Silver Eagle has become what the uncertified American Silver Eagle has always been: a commodity. Indistinguishable and interchangeable, with branding becoming less and less important.
For now, the services are stalling the inevitable by producing novelty labels. In 2014 alone, we counted over 50 unique labels for the Bullion version. They feature the facsimile and real signatures of Major League Baseball players, former Mint Directors and Chief Engravers, a variety of attractive but disposable graphical motifs, and labels that signify that the coins were graded in the first month of issue.
The seemingly endless emission of these novelty labels and the various ways these coins are marketed are as disorienting to seasoned analysts as they are to the average collector.
A tacit acknowledgement, perhaps, that for the Silver Eagle, the grade is just window dressing.
*For one more example, check out our original article on the modern Ike dollar market here.
**The article applies to Proof (PR/PF) coins as well, but for clarity’s sake we restrict it to MS.