Cigar Aficionado

It was billed as the "Rendezvous with Destiny" sale, and as the world's preeminent coin collectors streamed into the St. Moritz Hotel in New York City last spring, euphoria reigned. No one was thinking of the pall that had settled over their world earlier this decade, the "crash" that sent the values of super-grade coins plummeting 50, 60, even 70 percent from their stratospheric levels of 1989. Instead, as the CNN cameras focused on the glittering Draped Busts and Liberty Seated coins and other fabled items from the Louis E. Eliasberg Collection, the giddy talk among dealers and investment consultants was only of anticipated record prices--the "bounce" that would spur a long-overdue turn in this bearish market.

These coin specialists had reason to rejoice when the sale's final session began with a landmark price of $308,000 for a 1795 Flowing Hair silver dollar. Soon other records toppled, and with each new high, emotions seemed to be fueling a feeding frenzy. It was still debatable whether the bulls were coming back, and if rare coins had regained their investment luster. Yet there was no mistaking the fire and smoke that characterized the bidding battle for the king of American coins, a Stickney Class I 1804 silver dollar, which finally sold for a headline-grabbing $1.815 million.

"People were spending so freely, even nontrophy coins sold at unbelievable prices," recalls Scott A. Travers, the vice president of the American Numismatic Association and a consumer advocate who's written 17 books on coin collecting. "This was an extraordinary event, and because such a competitive environment builds confidence, people just got crazy."

But aside from the dazzling flash of this record-grossing, $45 million sale, which one dealer says "spurred new widespread interest in coins, their magic and rich history," what lessons, if any, did the extravaganza hold for potential investors, or collectors? With stock prices still high, inflation checked and gold in the doldrums, was this auction a mere aberration? Or has all the risk been squeezed out of the market, and is this now the time to go bargain hunting for pieces that are selling for a fraction of their 1989 value?

Market watchdog Travers, a coin investment consultant for 22 years, who's won a great deal of enmity in this otherwise clubby world because of his "survival guides," insists that "there was no economic justification" for those landmark Eliasberg prices. "Bidders had the certainty that these were original, undoctored coins, and trophies are just not representative of the entire market."

Although he remains skeptical about a universal upsurge in prices in the late 1980s, Travers still says, "There are tremendous opportunities for newcomers in today's coin market; 1854-1855 Liberty Seated quarters with arrows in mint-state 65 [a system of coin grading based on a scale of 1 to 70] are really popular, and at $7,000 [compared with $13,500 in 1989] are very underpriced, with a potential for shooting up dramatically. The same for three-cent nickel pieces in proof 67. Rare dates were priced at $14,000 in '89, and though they're very difficult to find, this is a true connoisseur's coin--an item that can be picked up at $1,200 and could easily go through the roof one day." Budding numismatists might have to do more homework than was required during those glorious 1980s, when Wall Street brokers adopted coins as an investment vehicle and sent prices soaring. Novices may even lose some money when they first enter this market, where promotional schemes abound and various tricks are used to disguise a coin's true grading value.

While Travers says, "The coin market on the whole is very risky, a place where caveat emptor is an understatement," he also points out, "there are ways to profit today, to even make quick killings, if consumers proceed on the basis that most coins are lemons, not very high-grade. There's real caviar out there, extraordinary super-grades with great investment potential. Newcomers just have to realize that in this search, knowledge is real power."

Traditionally the "hobby of kings," a pastime reserved for gentlemen in oak-paneled salons, coin collecting hasn't always been such a playing field for profit seekers. While scoring financially now adds to the excitement of chasing rare coins, many aficionados are content to be pure hobbyists, amassing pieces that mirror history, art and other civilizations. Emotionally tied to their "specimens," and viewing these holdings as long-term projects, these purists aren't driven by profits or trends in the marketplace. To them, assembling or completing a series of rarities is the only thrill.

As many newcomers will discover, it's easy to become a collector at heart, a purist who simply wants to amass and carefully hold such lustrous gems as 1838 No Drapery quarters and 1806 mint-state half dollars with gold, blue and lilac toning. Along with their sheer beauty, as James Earl Jones rhapsodizes in a video sponsored by the American Numismatic Association and the Professional Numismatists Guild, these pieces also "have a story to tell...it's history you can hold in your hand."

Yet to take even tentative steps into this arena, enthusiasts should be prepared to spend $10,000 to $50,000, and when that much money is at stake, it's understandable why an investment mentality must also affect buying and selling decisions. For in today's market, some coins given numerical rankings by professional grading services are traded sight unseen, like commodities. The most subtle distinctions in a coin's appearance, or state of preservation, determine those ratings--variations that result in huge differences in pricing.

Before the 1986 advent of the Professional Coin Grading Service, assessment standards were so subjective that they fluctuated wildly with market conditions. Numerical rankings were meant to replace unscrupulous market practices with a precise, scientific system of evaluating a coin's value. The 1-to-70 scale was established, whereby mint-state (or never circulated) coins, which show no signs of wear on their highest points, are given a grade between 60 and 70 (the demarcation point for "investment" coins generally starts at MS-64). Once a coin was certified it was also "slabbed," or sonically sealed in a plastic holder denoting its grade. This was intended to reduce tampering, and to give the burgeoning mid-1980s sight-unseen trading market a certain degree of predictability or constancy--what Travers calls a "revolutionary" sense of order.

But this is where the pulse-heightening fun begins: a coin enthusiast must balance certain risks with the ever-bewitching lure of instant profits. For despite the grading services' best intentions, there are flaws in the certification process, loopholes that allow high-stakes gamblers to engage in what longtime dealer John J. Ford Jr. calls "low-level larceny," or what's more commonly known as the "crack-out game."

Another term for fooling the grading services, or at least capitalizing on price gaps in their certification system, the crack-out game can be a way to reap profits right now in a market plagued by stagnant values (as Travers suggests in his book How to Make Money in Coins Right Now, published by House of Collectibles--a division of Random House--1996, $12.95, 274 pages). Still, this game isn't meant for the faint of heart. Why?

Take two mint-state 65 Morgan dollars, for example. One could have satin-like luster with no apparent flaws on Miss Liberty's cheek, while the other piece may have a small scrape on her cheek. Due to the strict standards imposed by the grading services when they were first established, both coins are still slabbed at 65 and are supposedly worth the same amount of money. Yet what happens if that scraped Morgan were cracked out of its holder, allowed to "age" in, say, a wooden dresser drawer where a sulfide reaction could produce beautiful toning that can mask hairline scratches (just one of the tricks of crack-out specialists), and resubmitted to a grading service? It's very conceivable this coin would win a 66 rating and be worth thousands of dollars more. (Another "make money now tip" is to look at the holder. If it's not hologrammed, that means the coin was graded years ago under the tougher standards and might easily win a higher rating. Standards were eased after the first few years of the Professional Coin Grading Service. Industry players generally felt that the interpretation of the standards on higher grade coins was too strict.) However, though a crack-out player may feel that one of his 65s is worthy of a higher grade, there's always the downside risk that his coin could come back rated at 64. That may mean his taking a whopping loss.

So how do novices, who know little about the esoteric system of grading and the sophisticated tricks that "coin doctors" use to alter or "restore" coins, play this game?

They shouldn't. At least not initially. Though the crack-out game seems like a sexy way to score big profits, Plainview, New York, coin investment specialist Maurice Rosen insists, "Financial players can only find bargain-priced coins in today's market by first learning the facts of life. They must thoroughly acquaint themselves with such basics as the handling and viewing of coins, get a feel for the inside workings of the business, how dealers operate and, above all, learn to spot real trends in the marketplace by deciphering the behind-the-lines subtleties of pricing guides and population reports [which focus on a coin's rarity]. Instead of newcomers jumping in headfirst or fooling with the risky crack-out game, the much smarter play is to put a toe in."

Educating oneself over a three- to six-month span admittedly lacks the thrill of rushing into the marketplace to acquire a few brilliant, five-figure gold coins. But before novices start looking at catalogues or Internet sites, all beautifully illustrated with glittering pictures of "exceptional, finest-known specimens," the wiser move is to first get some buying leverage.

That comes with joining the world's largest fraternity of collectors, the 29,000-member American Numismatic Association (ANA). More than just a club with an extensive lending library, the organization keeps track of members' complaints against dealers and, by also mediating those disputes, serves as a vital consumer protection agency. "An ANA membership immediately gives consumers a little power, since no dealer wants to mess with the association," one collector says. "Coin merchants desperately want to have a presence at the ANA's annual convention and at other important industry shows. Yet this presence would immediately be threatened if they accumulated too many complaints and black marks."

Another first step is to read the collectors' bible, the weekly "Certified Coin Dealer Newsletter" (or "Bluesheet"), which is the $1 billion industry's most accurate guide to U.S. coin prices. (While Roman and other ancient coins have their following, U.S. coins are the overwhelming favorite of collectors in America and abroad because of their variety and great availability.)

Prices of American coins are significantly influenced by rarity, and to determine the number of certified mint-state coins in each U.S. date and series, consumers have long trusted the "population reports" issued by grading services. Subscribing to these census tracts, however, may have limited value, according to Travers and other critics, who charge that they've been "skewed" by the wave of resubmissions unleashed by the crack-out game. "Novices heavily rely on these reports when buying, and that's a big mistake," says Travers, who, as an expert witness and consultant, has assisted the Federal Trade Commission in its various attempts to curb coin industry abuses. "Say someone resubmits the same coin 147 times. Then, after it's sold to a dealer, it's again resubmitted another 200 times. All this just adds to the 'population,' and so while there may be only one of these coins in existence, it seems like there are 347 of them. This is one area where a novice has to depend on a dealer's honesty, as he can't be an instant expert on rarity."

Beginners can rely on another tool, a source of inside information that virtually puts them on the same footing with the coin world's heaviest hitters. "Dealers can tell you anything they want when it comes to pricing, commissions and premiums," says one collector, who, like most of his fellow coin lovers, insists on anonymity. "That is, if consumers buy blind. The smarter move is to subscribe to a computer network such as the Certified Coin Exchange. Then you'll see the actual prices dealers pay for coins and be able to develop a real feel for where the market is going."

Cyberspace offers numerous informative links, from sites that provide primers in the basic terminology, to those that detail promotional scams and how to avoid them. Most major associations and societies have e-mail addresses where various guides to collecting can be secured, and there are several sites that focus on investment strategies. But derisively calling the Internet "The Great Leveler," Travers insists, "The cyberspace coin world is rife with abuses. The Internet gives scam artists and hangers-on the opportunity to engage in systematic fraud in the same mask as legitimate dealers. All too often people have bought coins and never gotten anything in the mail. Beware! The Internet is just too risky."

Despite these misgivings, the Internet is still popular with bargain hunters. However, the Internet poses another danger, one that's perhaps even more worrisome than outright fraud. It encourages sight-unseen buying by beginners on the principle that all coins receiving a similar numerical grade are of equal quality. As Professional Numismatists Guild president Richard J. Schwary cautions, "Say that one mint-state 64 Stella $4 gold piece is priced at $50,000 on the Internet, and another one at $35,000. That lesser-priced coin might not be the better deal. Yet Internet buying promotes shopping around for bargains. That's why I feel sight-unseen mechanisms--which have steadily lost favor in the marketplace--don't work for consumers. They can really wind up with a lot of junk, so they should instead focus on establishing a relationship with a dealer."

Developing those ties, however, demands patience and research. While such merchants as Bowers and Merena, Stack's, and Heritage Rare Coin Galleries have a reputation for honesty, prospective buyers must still find a dealer with whom they feel comfortable, someone, preferably, who has "an arm's-length relationship" with his own inventory. "The bottom line of a good dealer is his having objectivity, someone who'll at times completely ignore his own inventory and assist consumers in purchasing items from another merchant," says Maurice Rosen, the editor of the "Rosen Numismatic Advisory" newsletter. "Make sure that person is committed to the business, that he wasn't selling cars a few months ago, and is willing to share insider secrets. You just shouldn't work with someone who seems like he's always trying to sell something."

Attending seminars and shows is one way to find a dealer who's reputable and belongs to coin collecting's inner circle. There, prospective buyers are advised to ask about a firm's history and whether it's a member of the Professional Numismatists Guild (an organization of coin and paper money dealers that compels members to settle disputes with consumers through binding arbitration). It's also important to know whether a company has been operating under the same name for five years or five months, and whether there are any lawsuits or allegations of wrongdoing pending against its officers. (Call the Federal Trade Commission or your state attorney general if you're in doubt.)

As Travers warns, "Buyers should only work with dealers which are affiliated with the Numismatic Guaranty Corp. of America [NGC] or the Professional Coin Grading Service, for these services have a very careful membership screening process. They use member dealers as so-called 'official submission centers' for uncertified coins, so they conduct exhaustive investigations to make sure prospective members won't switch these coins before they're graded."

After novices attend a few auctions--only to view coins and not to purchase any (for auctions present their own bag of tricks)--they are ready to work with a dealer. But again, certain safeguards must be followed.

Buying only "established" or NGC- and PCGS-certified coins is strongly recommended, since the values of these pieces are readily accessible in the numerous price guides. (Unlike sharply detailed "proof" coins from the 1960s. Those certified in proof 69, for example, were minted in the millions. These coins are rarely graded, Travers says, because most collectors already know they'd be cerified proof 69. Thus, proof coins that are certified have no reliable pricing mechanisms and are consequently being widely promoted in telemarketing schemes.) Moreover, once a coin is certified, this serves as an insurance policy, as the grading service will buy back the piece at its "slabbed" value if a carbon spot darkens the coin's appearance.

If a slabbed coin has been doctored, or if it turns out to be a counterfeit, the grading service will also buy the coin back. But shrewd buyers, according to Travers, also "take nothing for granted." Besides learning about a coin's provenance, consumers are advised to ask a dealer where the coin was bought (for you want to know if the dealer is selling this piece from his own inventory or acting as a seller's consultant) and to see sales documents showing how much he paid.

"As David Hall, the founder of PCGS, has said, 'Many coin dealers are rip-off artists,' " says Travers, "and to make sure they don't get fleeced, new buyers should stay with known, established coins, those with a trading history, and some decent pricing data. Otherwise, without that data, a dealer might have some rare patterned coin, where only two of them are known, and there's no pricing history except for auctions. This dealer could've placed the coin at those auctions himself, and bought it back just to establish a high value. Then he'd say, 'This coin brought $60,000 at auction. But you can have it at $40,000.' It's not impossible that the same coin will only bring $2,800 at an auction a year later."

A longtime appraiser of rare coins who's been called the "Ralph Nader of Numismatics" by The New York Times, Travers is a walking encyclopedia of numismatic scams and tricks that are used to distort true values. "Many $2 1/2 Indian gold pieces have been graded 60, 61 or 62 by the services because they have gigantic gouges on the cheek [a very grade-sensitive area], and otherwise would've been 66 or 67," says Travers. "So 'coin doctors'--and they're a problem of increasing magnitude--take gold filings, mix them with epoxy resin, and then place that mixture on the cheek to fool consumers and the grading services.

"Epoxy has also been used by telemarketers on the cheeks of Morgan dollars; and proof gold coins, those with a hairline scratch on their backgrounds, and graded 62, can be chemically altered. There are many tricks. But consumers don't have to be fooled. They just have to buy themselves a halogen lamp to look at hairline scratches. They also need a florescent black light to identify epoxy alterations. Then they should tilt and rotate coins under a light source to see if there's been any artificial toning placed on a coin to hide grade-detracting imperfections."

Though novices might not have the trained "eye" to outwit sharks and their tricks, Maurice Rosen applies an assessment standard that most of us can easily appreciate. "To avoid problems," he says, "beginners should only buy a few coins a year--those pieces that are legitimately scarce, which have a certain extra identity to them. For when you spot a true investment coin, it's like catching a dream, or seeing a Claudia Schiffer."

In this universe, however, where there are thousands of "beauties" on parade, looks can be awfully deceptive. Lustrous gold Saint Gaudens Double Eagles ($20 pieces), for example, along with Walking Liberty half-dollars, have recently been popular. Yet these are generic coins, or as Travers warns, "as common as grains of sand on the beach, with little long-term investment potential."

Morgan silver dollars bearing "ultracommon dates" in high grade (from the late 1800s), which Rosen says have been "vastly overpromoted," are another dubious investment. As for fractional 25-cent, 50-cent and $1 California gold coins (issued by private companies in the 1850s), which trade in a "gray world" with little or no pricing information, Travers cautions that "a dealer will get you with these every time."

So where are the true bargains, the investment coins that bewitch even such grizzled critics as Travers and Rosen?

Whether they're called the "true trophies" of the marketplace, "caviar" for real aficionados, or, as PCGS's David Hall has said, "the coins real men collect," proof gold coins are the blue chips of the high-end investment market.

Why they excite such a passion is easily understandable. Proof gold mintages are extraordinarily low, and since the variances between super-premium and low-end pieces are distinguishable to even untrained novices, James L. Halperin, the co-chairman of the Heritage Rare Coin Galleries, likens them to "buying real estate in a very desirable neighborhood like Beverly Hills.

"The market for proof gold might go down. But since you're less likely to overpay, these coins are a relatively risk-free play. Associated with great wealth, they're always very liquid, and since it doesn't take as much knowledge to collect them, or to figure out what they're worth, proof gold are the perfect coins for the new enthusiast."

While "the stuff of dreams," radiant, scarce and selling at a fraction of their 1989 prices, gold coins still present a challenge. Which ones are the best buys, offering the greatest potential to rise in value once the bear market turns?

Championing the idea of assembling a "type set" of proof gold pieces (or a collection of various designs, rather than one particular series), Travers says, "There are all sorts of wonderful investment opportunities here. Yet if I had to list a few special ones, coins that would be very showy and macho to own, I'd first go with a Liberty Head Double Eagle or Type 3 $20 gold piece, 1877 to 1907. A really magnificent, awe-inspiring coin, especially with cameo contrasts, it's a true trophy, a very rare coin which sold for $125,000 in 1989 and is now at $50,000.

"There's also the $2 1/2 Liberty [1857-1907], which in proof 65 is now $11,000 [down from 1989's $35,000], and of course, the $4 Stella [1879-1880]. Now at $60,000 in proof 65, this coin, like other pieces, has taken a big hit [$130,000 in 1989]. Yet these coins will come back dramatically because they represent the best of all worlds. They appeal to collectors, who aren't affected by economic downturns, and also to investors, for in terms of glitter and glamour, proof gold is nonpareil."

Yet much like any alluring woman who makes men forget all reason, proof gold coins are also dangerous. In the hunt for these trophy pieces, particularly at auctions, would-be "real men" lose sight of their better judgment and go way beyond their budgets to make what Travers calls "macho ego statements. Caught up in the excitement of the moment, it's very easy for novices to make all kinds of mistakes at auctions, to forget that these sales favor the consignor," says Travers. "They must instead stick to a price they write down before the sale, and go not one cent over that figure.

"I also recommend using the 'scream and shock' technique. Say you're willing to spend $15,000 for something, and know you can resell it for $14,000. Just wildly scream out $10,000. That'll scare the hell out of people, and in many instances you'll get the coin so quickly, people won't know what happened.

"Finally, sit in the very front of the room, or at the very back. If you're in the front no will see you bidding, and won't get into a spirited bidding war with you. While if you're in the back, you can see your competition, whether a collector is bidding, or if it's a dealer, driving up the price of his own coin. Then it's a big mistake not to get out of the bidding immediately."

Another grievous mistake novices make is to sell rare or more esoteric coins through dealers. In such a private sale, sellers might get 10 percent over "Bluesheet" values. But as dealer and PCGS director of research John Dannreuther says, "While a lot of common date coins aren't right for an auction, it's a much better play to test the market value of cachet pieces at an auction. There a seller could get a whole lot more money [than at a dealer] because it only takes two bidders to drive up the price."

If a seller goes the auction route, it's imperative that he know the value of his material, and carefully negotiate a contract with gallery officials that gives him assorted prerogatives.

"Too many consumers just give their coins away," says Travers. "Instead, they have to negotiate adequate buy-back provisions, and to always think leverage. For if they're holding a valuable collection, one that might have some uncertified coins which are probably 63s or 64s, they can go to that house and say, 'You can't have my collection unless you call these pieces 65s.' What's an auction house going to do, turn you away? So don't just accept an auction house's initial offer. Always negotiate, negotiate."

All these do's and don'ts might make survival in this world a tricky proposition, a challenge that's further complicated by scam artists and a growing number of counterfeiters.

Yet even if this world sometimes reflects the old adage that the love of money is the root of all evil, James Earl Jones isn't just blowing smoke when he lauds the satisfactions of collecting coins--in a savvy and judicious manner. As he and sophisticated devotees know, precious coins are a joy that makes their world go 'round.

Florida-based writer Edward Kiersh is a frequent contributor to Cigar Aficionado. VALUABLE CONTACTS

To find out more about coin collecting, consider these sources:

American Numismatic Association
818 North Cascade Avenue
Colorado Springs, Colorado 80903
Phone (719) 632-2646

John Dannreuther
868 Mount Moriah, Suite 202
Memphis, Tennessee 38117
Phone (901) 683-2492;
Fax (901) 683-6062
e-mail: jdrc@MindSpring.com

Heritage Rare Coin Galleries
Heritage Plaza
100 Highland Park Village, Suite 200
Dallas, Texas 75205
Phone (800) 872-6467; fax (214) 520-6968
Internet: http://www.heritagecoin.com

Professional Coin Grading Service
P.O. Box 9458
Newport Beach, California 92658
Phone (800) 447-8848
The world's largest third-party rare coin authentication and certification service, where fees are as little as $25 per coin

Professional Numismatists Guild
3950 Concordia Lane
Fallbrook, California 92028
Phone (760) 728-1300
Consumers can call for a free copy of the guild's pamphlet, "What you should know before you buy rare coins for investment!" and a PNG membership directory.

Maurice Rosen
P.O. Box 38
Plainview, New York 11803
Phone (516) 433-5800
Fax (516) 433-5801
His newsletter, the "Rosen Numismatic Advisory," offers in-depth analysis of market trends and is an indispensable guide for the rare-coin investor.

Scott Travers Rare Coin Galleries
P.O. Box 1711, F.D.R. Station
New York, New York 10150
Phone (212) 535-9135
e-mail: travers@inch.com Internet: http:www.inch.com/~travers/travers3.htm

Stack's
123 West 57th Street
New York, New York 10019
Phone (212) 582-2580
Fax (212) 245-5018
PLAYING THE CRACK-OUT GAME

It seems like a win-win gamble. Mint-state 64 or 65 coins are cracked out of their holders, resubmitted to a certification service, and given a higher grade, a rating that translates into instant profits.

But don't be fooled. Though Heritage Rare Coin Galleries' James L. Halperin has made millions of dollars playing the crack-out game, novices shouldn't even think about this gambit until they become astute at grading premium-quality coins.

"That's the key: if you don't know how to grade, you can't play the game," says Halperin, who's also a novelist (The Truth Machine and The First Immortal).

To play, Halperin advises buying uncirculated coins at a public auction ("That's where the best deals are, since the sales premiums are higher with a dealer.") and drawing up a chart, which lists the relative mint-state values of a coin. Taking a $2 1/2 Liberty gold piece, for example, the values could be as follows:

MS-63 $ 800
MS-64 $ 950
MS-65 $1,800
MS-66 $2,100

Here, it wouldn't make much sense to buy a mint-state 65 piece, since the upside potential is only $300, while the downside risk is $850. Yet what about that MS-64? This is certainly the winning play, since the downside loss is relatively small, while the upside potential is sizable.

One final word. When playing this game, or whenever handling your coins, always treat them as fragile gems. The perspiration from your thumb, or some foolhardy effort to clean coins, can instantly and dramatically reduce a piece's value.

Other "hot" picks include Capped Bust quarters (large size) in mint-state 65. Scott Travers says these 1815-1828 pieces were $40,000 or more in 1989, and are now only $11,500. He also likes $5 Liberty pieces from 1866 to 1907, in proof 65, that were $65,000 in 1989, and are now $22,000 to $25,000.

Numismatic newsletter editor and dealer Maurice Rosen favors $3 gold pieces in at least proof 65, now selling for about $20,000, or down from $70,000 in 1989. He also lauds 1873-1883 Trade dollars, either gem uncirculated or gem proof, which were minted specifically for trade with the Orient. Insisting that these Trade dollars have great historical significance, Rosen says, "I would snap these up, for they're a good $5,000 to $6,000 buy today, [down from] about $25,000 in 1989."--EK