Gradeflation

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It is a well-accepted fact that a coin kept in reasonably adequate archival conditions will not magically “change” grades. Some may point out that over time, the effects of the elements could potentially lower a coin’s grade, but no one would claim that a coin could somehow spontaneously repair itself. It sounds crazy, yet this bizarre belief has seemingly been adopted by coin certification and grading companies over the past few decades.

Changing Standards

The process of “gradeflation,” or the loosening of grading standards, has plagued both Professional Coin Grading Service (PCGS) and Numismatic Guaranty Company (NGC) for decades, as coins that once would have never received a desirable grade suddenly do. Former CEO of NGC Mark Salzberg notes this “dramatic increase in the grades assigned by PCGS” and asserts that the grading standards used by PCGS today are “different from the standards it used” even just 10 years ago. What does this mean for the coin-collecting community? To Salzberg, grade increases artificially raise the supply of coins previously rare in excellent condition, bringing down their prices when no real market shift has occurred. For collectors who pay the hefty premiums to certify coins or purchase certified specimens, gradeflation adds unnecessary downside volatility to an already volatile market.

As a former NGC executive, Salzberg focuses almost exclusively on the failings of PCGS and their grading practices, but NGC is equally guilty of the same trend, as noted by numismatic scholar Q. David Bowers. 

Rising grades may benefit grading companies in the short term, as many dealers have taken to cracking out and resubmitting older coins in hopes of receiving a higher grade. Through this process, grading companies receive multiples of the fees of submission and grading for the same coin. However, coin grades cannot continue to rise forever. Although grades can afford to shift up to once-elusive grades like Mint State (MS)-70, eventually there will be nowhere left to go. As lower grades continue to rise, a more drastic increase in the current artificial supply will take place. Grades will ultimately lose meaning as drastically different coins are smushed into the same grade, and the value of coins currently rare in excellent conditions will be diminished with large increases in their populations. Similar to the trend of gradeflation in academics, if everyone is exceptional, then nobody is.

Sticky Solution

With the launch of the Certified Acceptance Corporation (CAC), it’s clear that others in the coin-collecting community have noticed the issues arising with gradeflation. However, the solution to this problem should not involve consumers having to pay even more submission fees, as is the case with submitting coins to CAC. Additionally, CAC recently launched its own grading service. However, whether CAC grading will hold up to the high standards of grade consistency it preaches with its stickering service is yet to be seen.

Collector and investor demand for premium coin grades and competition to win over submissions that satisfy this demand have pushed both NGC and PCGS to become relaxed with the standards they once championed as fixed. This trend could ultimately affect CAC as well.

Market Standardizers

Grading companies provide a necessary service in numismatics. Their role as market standardizers of a coin’s authenticity, make, and condition is valuable in an increasingly complex and deception-filled marketplace. If grading companies hope to remain relevant, however, more steps must be taken to ensure that grading standards remain consistent and insulated from market pressures. Exploring measures like third-party audits, publishing detailed grading criteria, or even the simple acknowledgment from grading companies that gradeflation exists and is a problem can help rebuild confidence in coin-grade consistency. Only when these measures are taken can trust in coin grades be restored.

Sources

Bowers, Q. David. “Q. David Bowers: How Gradeflation Encourages Resubmissions for Higher Grades.” CoinWorld (September 16, 2016). 

“Certified Acceptance Corporation.” cacgrading.com/about.

Salzberg, Mark. “Salzberg Advises: Research PCGS Populations and Prices.” ngccoin.com/news/article/5740.