GRADING AND AUTHENTICITY, RARITY AND THE ESTABLISHMENT OF VALUE (PART 1)
By Neil S. Berman
Superior Galleries of Beverly Hills

Grading

We have consistently stressed the critical importance of rarity and quality when investing in rare coins, and illustrated the vast price differentials generated by even the slightest incremental changes in a coin's grade, defined as condition or state of wear of the coin.  Grading remains the single most important element of numismatics. Few skills among Numismatists and Coin Dealers are more important to know or more difficult to learn. And there are very few really fine coin graders in the world.

While grading is not a foolproof or exact science, neither is it strictly guess work or a matter of opinion.  It is an art governed by exacting standards and rules that insure a relative uniformity of appraisal from dealer to dealer at any given point in time.  At one time, a collector was forced to depend almost entirely upon his own knowledge, intuition and "eyeballing" abilities--all of which were, of course, uncertain, and could and did change with time.  Over the last sixty years, however, owing in large part to the Sheldon Scale, the rigorous application of clearly defined specifications has made grading more objective and, thus, much more uniform.  Minor disagreements can and still occur; but the investor should not receive radically different estimates of grade from competent but competing Numismatists.

Until the rare coin market became primarily investor-based, and the need for greater degrees of accuracy and consistency arose, grading was a relatively subjective business, based on the knowledge and experience of whoever happened to be grading a coin.  While it did not matter much as it does today, needless to say, the result was a lack of standardization.

In 1948, Dr. William Sheldon, in his book about Large Cents, Early American Coppers, introduced a grading scale that in a highly modified form has become the standard for the industry today.  Other significant landmarks included Martin R. Brown and John W. Dunn's, A Guide To The Grading of Rare Coins (1958) and James F. Ruddy's Photograde (1970), both of which contributed substantially to the evolution and standardization of grading.

In 1977, The Official American Numismatic Association Grading Standards For U.S. Coins expanded the Sheldon Scale to include all coins, thus further legitimizing this most comprehensive and effective of methods.  That same year, Grading Coins: A Collection of Readings, edited by Dr. Richard Bagg, drew together in summary form almost everything written on the subject since the 1890s, thus providing a valuable guide to the evolution of numismatics' most critical science. In 1986 Numismatist James Halpern released his classic How to Grade United States Coins. In about 1985 and 1986 the first reliable professional grading services were founded, more about this later.

A variety of factors affects a coin's grade.  The die may inflict marks during the minting process, or result from the condition of the planchet, which is the metal disc on which a coin is struck. Irregularities and imperfections found on the die may stem from the engraver's errors, or something as simple as wear and tear.  Substandard manufacturing often resulted in coins that seemed to be in worse condition than they really were.  This is particularly true of early American issues, most of which were produced under primitive conditions.  Coins minted with poorly made or overused dies sometimes seem more worn then they really are -- a condition known as apparent wear.  Worn dies were often polished and reused repeatedly, resulting in the removal of fine design details found in the original design or the addition of a new date or mint mark.  This is one of the reasons that some of the resulting coins produced are what are called "varieties" of the original coins.

However, while die marks in general have the least bearing on a coin's worth, planchet irregularities can be more serious.  These have various causes.  For example, planchets for gold coins and large sliver coins were weighed before striking, to insure the presence of the proper amount of precious metal; those found in excess were filed down to the appropriate weight.  This left file grooves on the planchet, called adjustment marks that often remained visible after the coin was struck.  If present, they will be taken into consideration when the coin is graded.  Other planchet marks result from irregular blanks and some numismatists specialize in collecting such coins.

By far the most common marks that appear on coins are inflicted after minting.  So-called "bag marks" result from the banging together of coins after they have been bagged for shipment or storage, and the number of marks, and their placement, makes a difference.  Coins are also subject to the effects of daily use--dents, scratches, bends, rim damage, and the like.  Alternatively, they may have been damaged intentionally, as is the case with coins worn as jewelry, and marred in the mounting process.  Such insults will significantly diminish a coin's worth.

Toning or coloration is also a consideration.  Metals often react to their environments by changing color; and numismatists must learn how coins of differing alloys can be expected to color after years of use--or, for that matter, disuse.  This knowledge is necessary and invaluable.  If a coin is shiny and bright, just as if it left the mint, but its surface is scratched and marred, a competent numismatist should suspect polishing, chemical or even laser treatment at the hand of an unscrupulous vendor.

Of all the metals used in the creation of American coins, copper is the most susceptible to changes in color.  A copper coin, when minted, will have the familiar brilliant pale red color we associate with new pennies; this mellows first to a reddish brown, and finally a glossy brown color.  When an expert grades a copper coin, its color will be taken seriously into consideration:  those that retain their original mint brilliance are considerably more valuable than those having a darker tone.  Additionally, the surfaces of some copper coins may become spotted with corrosion, and investors living in humid locations should be particularly careful to store them in dry environments.

Like copper, silver is a highly active metal, and may darken from its initial brightness into various colors or hues.  The value of a silver coin can be greatly increased by attractive original toning. Nickel’s silvery brilliance pales with time into a dull grey color.  Nickel is very susceptible to corrosion. Moreover, gold, the least reactive of coin metals, exchanges its alluring bright yellow-orange for a deeper, more full-bodied tone, sometimes containing brown streaks produced by the alloying material.  A handsomely-toned gold coin will be especially prized by investors.

Natural or original toning is caused by the surface of a coin being exposed to the atmosphere for years and oxidizing.  The toning process is accelerated when a coin is housed in one of the old type paper envelopes, due to the sulfuric content in the paper.  Coins stored in these paper envelopes tend to tone evenly because the obverse and reverse are in full contact with the paper surfaces.  On the other hand, when coins are kept in coin albums, toning first occurs by the rim or edge and progresses toward the center of the coin.  Coins are often taken out of these paper albums before the toning process is complete, resulting in a ring of peripheral toning.

Coins may tone in almost any hue of the rainbow, or a combination of colors.  A choice coin may often bring a tremendous premium because of its gorgeous toning, which is derived from the amount of "flash" or eye appeal a coin offers.  This is part of the subjective value of a rare coin or any collectable for that matter.  Some uninformed buyers consider toned coins "dirty."  Others prefer to buy toned coins rather than brilliant specimens.  In the end, if the coin is original it is a matter of personal taste.

In the grading process, coins are divided into two broad categories:  Circulated, which means coins used in commerce, and Uncirculated, which means coins that are new and have not been used in commerce. Because Uncirculated or Mint State coins (UNC or MS) have never been used they will appear virtually as minted, without any signs of wear.  Uncirculated coins are not necessarily perfect in every respect as they are struck without any special care, and packed en masse in bags, and are then ready to be placed into commerce.  Marks are thus to be expected as bags of coins are recounted and shipped between the mint and banks, where they are carelessly dragged around various vaults with each inventory as the sit for years unreleased into commerce.  The larger the coin, the more marks are likely. To accommodate imperfections, Uncirculated coins are graded with Mint State designations, from MS-60 (Uncirculated) through MS-65 (Choice Uncirculated) to MS-70 (Gem Uncirculated), with grading dependent upon the degree or lack of imperfections.

MS-70 Perfect Uncirculated 70
A flawless coin, exactly as it was minted, with no trace of wear or injury.  The coin must have full mint luster, and brilliance, or original toning, and a full strike.  For all intents and purposes, this grade is theoretical.  Only a highly trained specialist can grade this coin.

MS-67 Gem Uncirculated 67
Minutely disturbed surfaces, well struck, superior luster, and incredible eye appeal. Any marks must be where you can not see them easily.

MS-65 Choice Uncirculated 65
A coin that is far above average Uncirculated; a coin that possesses a superior strike, exceptional luster or desirable original toning with only some minor marks which do not detract from the overall pleasing appearance of the coin.

MS-63 Select Uncirculated 63
A mid-range Uncirculated coin which may exhibit numerous but non-severe marks.  It may have a weak but not a poor strike, and it may not be fully brilliant, although it will not have a dull finish.

MS-60 Uncirculated 60
A coin that will have no trace of wear but may show numerous contact or bag marks, nicks or spots.  It may lack luster and/or have a weak strike.  This is the lowest grade a coin can be and still be new.

Circulated coins, as their designation suggests, are coins that have been used to some degree.  The grading scale for such specimens stems from Poor-3; applicable to an example so worn its features are barely visible, to About Uncirculated-58, which denote a nearly Uncirculated appearance.  It is virtually impossible to make distinctions between used coins adjacent on the grading scale--for example, a 30 and a 31; as a result, the scale has been divided into groups:

AU-58 Choice About Uncirculated 58
This is a virtually new coin, with luster and the basic appearance of a new coin, but has slight wear.  It was sometimes called a "slider" in the trade if the wear came from a coin holder.

AU-55 Choice About Uncirculated 55
The wear is barely distinguishable but is visible on the highest points.

AU-50 About Uncirculated 50
Nearly all of the detail and most of the luster are still present, but there is light wear on the high points.

EF-45 Choice Extremely Fine 45
There is visible wear on the highest points and most of the luster is still present. (or XF-45)

EF-40 Extremely Fine 40 or XF-40
Most of the detail and some of the luster still present.

VF Very Fine 20, 25, 30 or 35
Light to moderate wear with most of the design still visible and the high points rubbed smooth.

F Fine 12 or 15
Moderate to heavy wear with up to half of the design rubbed smooth.

VG Very Good 8 or 10
Some of the design still visible but still having full rims.

G Good 4 or 6
Some of the design still visible but will be weak and may not have full rims.

AG-3 About Good 3
Most of the design will be gone.

FR-2 Fair 2 Design will be barely distinguishable but still recognizable.

PO-1 Poor 1 Design is recognizable by date and type but no more.

It is recommended that you consult an expert to grade all coins that are AU-50 (About Uncirculated) or better.  A circulated coin's grade is usually more straightforward, although there is just as much over grading and under grading among circulated coins as Uncirculated coins. Nonetheless, when one side of a coin has worn at a different rate than the other, the Numismatist used to resort to a so-called "split grade":  two grades for one coin.  A coin with an obverse (head) grade of EF-40 and a reverse (tail) of EF-45 would be graded at EF-40/EF-45 (or, commonly, 40/45).  It is by the lower of the two grades by which the coin was traded under this arcane grading system.

Precision Grading

Due to changing market conditions in the mid and late 1980’s, such as the increased importance of mint state coins, the most commonly traded investment material, and near mint state coins, and the demand for gem or perfect specimens, discrepancies developed between the various grades and their pricing structure.  Because of the geometric climb in value of quality coins from one grade to the next, a circumstance which is characteristic in the real world of investing in and collecting objects of art, Precision Grading was developed by a group of coin dealers to overcome the discrepancies in the pricing of middle grade Uncirculated coins. This was the beginning of professional grading services and the beginning of order in the coin business.  The following two tables illustrate what Precision Grading is and how it works.

Both professional grading services and all knowledgeable dealers use Precision Grading.  A dealer using this system would use a chart much like the one we have just seen, with the addition of the middle grade Uncirculated coins.

MS-70 Perfect Uncirculated 70
A flawless coin, exactly as it was minted, with no trace of wear or injury anywhere.  The coin must have full mint luster and brilliance, or original toning, and a full strike.  For all intents and purposes, this coin is perfect and therefore theoretical. Only a highly trained and experienced specialist can grade this coin.

MS-69 Superb Gem Uncirculated 69
The late Norman Stack would have said “As made.” A coin that is exactly as it was minted, with virtually undetectable flaws and only a few minor marks that keep it from being nearly perfect.  The coin must be brilliant or have original toning.  You need a specialist, like Norman, on this grade, also.

MS-68 Gem Uncirculated 68
One or two barely noticeable, minor marks or abrasions, slight weakness of strike allowed, blazing luster and spectacular eye appeal.

MS-67 Gem Uncirculated 67
Minutely disturbed surfaces, well struck, superior luster, and incredible eye appeal.

MS-66 Choice Uncirculated 66
This grade coin is basically a premium quality MS-65 specimen; an MS-65 which possesses extra special appeal that adds to the overall beauty of the coin.

MS-65 Choice Uncirculated 65
A coin that is far above average Uncirculated; a coin that possesses a superior strike, exceptional luster or desirable original toning with only some minor marks which do not detract from the overall pleasing appearance of the coin.
  
MS-64 Select Uncirculated 64
A nearly MS-65 coin; a coin that may slightly lack in one of the key areas.  It possesses either slightly more marks, slightly less luster or a weaker strike.

MS-63 Select Uncirculated 63
A mid-range Uncirculated coin which may exhibit numerous but non-severe marks.  It may have a weak but not a poor strike, and it may not be fully brilliant, although it will not have a dull finish.

MS-62 Uncirculated 62
A coin that is nearly MS-63; a piece that may have one excessive mark, or reasonably weak strike.

MS-61 Uncirculated 61
A high-end range MS-60 coin.  It may have excessive marks and possess a weak strike, but it is not in the worst mint state grade available.

MS-60 Uncirculated 60
A coin that will have no trace of wear but may show numerous contact or bag marks, nicks or spots.  It may lack luster and/or have a weak strike.  This is the lowest grade a coin can be and still be a new coin.
Eye appeal is one of the most difficult attributes to the grading process to describe, and yet it is one of the most important. Regardless of the technical grade of the coin, that is the Mint State number assigned to the grade, the coin has to have an overall appearance that is just about as important but nearly ethereal to describe. The coin can be brilliant with flash, proof like with a mirror finish, matte white, or completely or spherically toned. Coins without eye appeal may be poorly struck, have dull or spotty luster, splotchy or irregular toning dark spots. A dealer can be very helpful on this subject as it can take years to learn what good eye appeal is if it does not come to you naturally. The best way to summarize this is to paraphrase Justice Black of the United States Supreme Court, who in describing pornography once noted that although he did not know how to describe it, he knew it when he saw it.