By Greg Reynolds for CoinWeek …..
Though auction prices are often cited as market prices, not enough has been written about the nature and meaning of auction prices and how these relate to market prices. In this article, I’m not talking about bullion items or generic coins like the 1924 $20 double eagle or the 1881-S Morgan dollar. Instead, I’m 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?
What Do Auction Prices Mean?
To help answer that question, I asked some experts.
Kris Oyster of Dallas Gold and Silver Exchange 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.
For our purposes, “Wholesale” can be thought of as what dealers are willing to pay in dealer-to-dealer transactions, and “retail” is the price that dealers offer to collectors that they don’t have a previous working relationship with. Often, but not always, an auction price will be in the upper register of a wholesale price range or in the lower part of a retail price range for a respective coin. As to why “retail” is the higher of the two, keep in mind that a dealer likely has their own capital tied up in the purchase of the coin for their inventory and must cover those costs in any given sale (one dealer buying from another can even be seen as lowering the first dealer’s inventory costs).
So one factor influencing this pricing between wholesale and retail might be that while an auctioneer is paid a commission from the buyer and the seller of a coin, they otherwise have no financial interest in what the coin costs to either party.
But an exception to this middle-ground pricing is when extremely rare coins are sold at auction. On average (but not always), these realize stronger prices than coins that are not as distinctive. Consider, as examples, Capped Head $5 half eagles from the 1820s, U.S. Patterns, 1854-S $2.50 quarter eagles, 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 them to collectors for 5% to 40% over their respective auction prices. In some cases, the auction result for an extremely rare item will be a retail price and, in other cases, it will be a wholesale price (the markets for rare coins can be thinly capitalized). It doesn’t 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, CAC President 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 NGC, and in 2007, he founded 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 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 (Numismatic Financial Corporation).
At auctions, Kleinsteuber says that “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,” he said. “I need to know what the coin looks like. Just knowing its [type, date, and] certification is not enough.”
When 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 than when a coin 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 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 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. But then again, if not-so-serious collectors or even zero collectors bid on a coin, the auction result could still be a retail price.
When Collectors Are Represented by Dealers
To acquire coins at auction, a collector may be represented by a dealer. A fee is usually paid for this service, 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, one that is not based on a percentage of the price realized. Nevertheless, the standard fee for such a service has always 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 they may just place their own purchases and their clients’ on one bidder number. In many cases, it’s not apparent to other participants or even to the auction company that a dealer is representing a collector. Nonetheless, when dealers/agents are competing with collectors and/or other dealers, the coins purchased are likely to sell for prices in the retail range.
When Dealers Bid on Coins with a Customer in Mind
It is not unusual for a dealer to buy a coin at auction with a collector/customer already in mind. In such a situation, the dealer doesn’t know for certain that this collector will buy the coin, but it’s likely. The collector may wish to examine each coin before making a final decision. In this category of auction bidding, the dealer is thus assuming more risk than one would be if they were representing a collector for a 5% fee. So in this situation, the dealer will probably offer the coin to the collector they had in mind for 6% to 15% over the auction result.
In the event that the targeted collector fails to buy the coin, the dealer will likely offer it to other collectors for 6% to 30% over the auction result, depending on 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 sell 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 of dealers. Bidding in all three of these categories will often push auction prices into the retail price range.
When 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.
It is important to emphasize that most dealers who play the ‘crackout’ game lose money. Likewise, there are a fairly small number of coin doctors who can successfully deceive professional third party graders. The point in this context is that when bidders want 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 MS64 may be graded “MS66” by two bidders who seek to upgrade it.
When Dealers Buy to Sell to Collectors
Curiously, many mainstream dealers (in rare U.S. coins) attain most of their inventories at auction. By this, I mean 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 that coin.
Generally, when a dealer buys at auction with the idea of selling to a collector in less than one year, he should be 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 proper if the collector-oriented dealer thinks they can pay a retail price and then charge still more. Some dealers have an advanced understanding of the markets for particular kinds of coins and/or a strong clientele for such coins.
When 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 collectors as customers. Most of them don’t even want to meet collectors. There are wholesalers who trade exclusively 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 not as often as they purchase coins privately. There are many collectors who wish to physically examine coins for themselves before making a decision. Furthermore, there are collectors who do not feel comfortable making the snap decisions required of an auction setting. Coin collectors frequently take a leisurely approach to acquisitions. Moreover, in many instances, collectors are persuaded by dealers to buy specific coins. The dynamics of an auction are different from the characteristics of a private sale, in which collectors are 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 anyone who devotes a lot of time to researching coins. After auctions, many auction purchases can be seen at dealers’ tables on the bourse floors of shows and conventions.
How about the connection between auction prices and estimated values in price guides? I asked Laura Sperber of Legend Numismatics 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) dealers and collectors 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.
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