madcoindealer

[madcoindealer]

The Death of the Coin Shop and polarization of markets within coin dealing

I want to examine three trends today. They are not new, but they are accelerating:

1. Polarizing the buy and sell markets

There has been an increase in the number of venues which are “buy only” and “sell only” as market polarization increases. Physical brick and mortar shops are now increasingly “buy only” establishments from the dealer perspective, as the hobby has fewer buyers. These establishments are making their money on the buy-side of the transaction by paying under market, and have decided that to maximize profits, they will not sell in the same marketplace. Or, if they do sell – they sell only bullion and no numismatic items. What other business exists where they will buy your goods, but not sell you equivalent goods? I think this has several causes:

a. Reputation management -shops do not want to be perceived as having “bad deals” on the sell side, as it may deter potential sellers once seeing reviews from disinterested buyers.

b. Opaque pricing – Having no “sell price” allows the shop to lie about their margins to the seller. I often go to shows and hear dealers listing off to the public their “overhead” in a lengthy list in an attempt to justify their buy price. My response to those dealers is the same: if you have so much overhead, why are you in business? Not revealing the true spread allows a seller to acquire a better buy price.

d. Cash flow optimization—There is no need to have coins for sale in a physical shop – If a shop is working on an exclusively wholesale agreement, the coins may be in the door one day, and out the door next day. Shops are looking more for cash flow than optimizing profit.

e. Profit optimization – Inversely, there are some shops which confusingly will not sell to other dealers, because they have such large collector bases online that any immediate sale presents no benefit when the item will be sold at full retail in days or weeks. Any sales to small time collectors in store are more hassle when items are optimized for eCommerce fulfillment.

Some shops are now heavily moving to wholesale models where they will exclusively sell to middlemen or large wholesalers (APMEX, JP Bullion, SD Bullion, Dillon Gage). There is similarly an emerging market of pure “sell only” venues in eCommerce, with dealers originating their collections from middle-market wholesalers, and selling to other collectors online, never physically seeing the originating collection, or the collector. As mentioned on Twitter, to support this new type of sell-only venue, some shops are now selling inventory to large flippers acting as wholesalers, bypassing the traditional wholesale market. In a bout of irony, the dealers who are adamantly against eBay are now having their items being sold on eBay 2 or 3 steps down the chain, and they may even be buying the same coin once it is graded by a third party. Because of all of these, the retail “coin shop” for buyers has been dying for 40 years, but it will find new life online (but at perhaps a worse deal; the ‘good deals’ will be reserved for those with the cash and patience to be collector-dealers)

2. Disinformation by Boomers regarding profitability and the new generation of dealers

The coin dealer footprint is shrinking and consolidating as the Boomers die off. They are not going out without a fight, and seem to be transferring much of the inventory holdings to their long established business partners, rather than doing the right thing for the health of the market, and selling to younger dealers. These old time dealers often shout the myth: “I don’t make a lot of money”, but this is purely for show. Yes, coin dealers make a lot of money! Scandalous! If a coin dealer is not making serious money from their business, they are bad at business, or lying, and it is impossible to tell without examining their financial statements. A new generation of dealers are emerging, and the next 5-20 years of cleaning out the dying Boomers’ stock is going to going to lead to increasing consolidation and the passing of a torch to a new tech savvy generation of dealers. Whether the torch is passed peacefully or wrestled out of a rigor mortis stricken hand is yet to be seen.

3. The pot will call the kettle black, and it will be on Facebook

Dealers have been calling other dealers frauds and crooks since coin dealing became a profession. The fact is, collectibles as a business is not based on extracting value from labor, but speculation of rarity, supply, and demand. Therefore, there is a large incentive to issue detractions of competitors to gain competitive advantage. Many dealers accuse other dealers of the same tricks they themselves engage in, especially when it comes to sourcing and pricing. Every dealer wants to give the impression that they have a magical source of problem-free coins and their competition is polishing old inventory and selling it as uncirculated. Recently this has been weaponized via social media, and this hostility has turned off many away of the dealers wishing to sell at retail pricing for fear of ostracization by the buyer-oriented community. An effect of this absence of the retail dealers is the emergence of the buyer friendly flipper on social media. Market-to-market arbitrage on social media is now occurring very often, with schemes like Instagram-to-eBay, Reddit-to-eBay, or Instagram-to-Facebook being the modus operandi of an entire new generation of dealers. In all cases, the buy sale is being made dealer-to-dealer with high amounts of information and low information asymmetry to the more casual collector sell side market with a greater amount of information asymmetry. In no-value-add markets like collectibles, profit is the result of information asymmetry because in a perfectly level market, the margins from normal lot sizing profit would not be enough to be sustainable, and thus the market should cease to exist.

Because of all these, we will see an acceleration of polarization and a shift to online-only sales venues in the next few years. Online sales venues allow for low overhead, reduced licensing, greater efficiency, and greater physical security. Dealers are now wising up to information arbitrage as a means to profit, and that arbitrage is leading to the separation of the customers, locations, and normalities of the buy and sell markets.

This is the Mad Coin Dealer. Leave your ethics at home.

[madcoindealer]

Coin Dealer 2020: Predictions for the next decade of the numismatic market

As we wrap up the decade, I want to make a couple of predictions for the future of the numismatic market.

1. Market polarization and middle squeeze.

Coin collecting as a hobby within the United States is long past its peak in terms of casual hobbyists. The demographics are becoming older, and the younger demographics are focusing on numismatic products which provide lower margins for dealers at an increased cost of customer acquisition. I see two markets developing: one is a high-end  market for certified coins with eye appeal as an important factor. The second market is one for high-volume, low-margin raw coin sales as type examples and pieces highly tied to the commodities market (junk silver). The market for coins priced from $20-$100 will be squeezed, as consumers look to join one of these pools. This will be hard to adapt for many dealers, given that this middle market generally provides higher profit margins with better-grade, better-date coins sourced from higher-end original customer collections. Differences of opinion of grade and arbitrage between pricing guides which may have resulted in easy profit before will be more difficult to come by.

Being successful in the high-end market requires extensive industry connections and a large amount of funding, because market making is slower due to lack of liquidity. Similarly, a large amount of capital and connections are needed to sustain an operation where the product is commodity-like; this is the end-result of a globalizing market. As a reflection on its customers, many dealers caught with a small client base relying on customer loyalty will be squeezed out, and we will see the transformation of some medium-sized firms into high-volume international dealers. On the other end of the market will be similarly more globalized niche firms (which may not be full-time operations).

2. The demise of the local coin shop

We are in the age of the Internet. The demographics of the hobby and increased expectations from consumers to offer free shipping put any brick-and-mortar store at an immediate disadvantage. Shows will continue to be important, and will become the primary in-person contact method for most collectors. This will not be a fast death, but will be like a boiling frog.

3. The rise of virtual dealers

The baby boomer generation places a high importance on trust in relationships when dealing with business transactions. Younger generations are more transactional, shopping around for the best price and have low search costs. This puts some dealers at a disadvantage in that customer acquisition does not mean increased reliability of cash flow. The cost of existing marketing campaigns versus customer lifetime value will make previous marketing methods unsustainable, and new channels will be formed. I predict that as the middle is squeezed, dealers attempt to microtarget niche markets via fictitious names and social media accounts. This microtargeting could have one dealer specializing in toned coins, another in junk silver, and another for customers within the Middle Eastern market. I think of this like "virtual restaurants" from meal delivery apps, where the restaurant in question doesn't exist, and one company operates many niche marquees.

4. Social media as the primary marketing channel

While one social media app may not be around for the next decade, I believe that social media will become the primary form of customer acquisition. The coin community already has a strong presence on YouTube and Instagram, and I see this expanding. eBay and Etsy will continue to be important marketplaces, but much like brick-and-mortar retailers, will become the marketplace showroom, with sales conducted off the platform to avoid fees.

5. Liquidation opportunities increase

There's no easy way to put this. The demographic is old and will start to significantly die out within the next decade. They will leave collections to their families, who will be looking for opportunities to liquidate the estate. Predatory cash-for-gold establishments may not be as prominent as during the great recession but will play a role in becoming a middleman in sourcing increasingly squeezed better-quality rare coins.

6. Consumer education reaches a low

Cash transactions are becoming more rare. Technological advancements in the minting process have produced consistent large amounts of coins every year, with fewer errors, and more than enough to fill consumer and collector demand since the 1970s. The mint has spent much time and attention in the past 20 years to work to create artificial scarcity for collectors. They have tried to pique consumer interest with 'W' quarters, but so far, the attention has not reached outside of the collector community. Consumers who are younger may have never seen a silver coin in change, or found any coin unknown to them in change. The rise of coin roll hunting has expedited the removal of 'odd' coins from circulation. The average consumer in America will know little about coin types or coin values, unless an immediate family member is part of the hobby.

7. Serious efforts begin to remove cash and favor all-digital transactions

I believe there will be efforts to move national currencies to an entirely digital format to save costs and prevent money laundering. Perhaps this will not use blockchain technology, but will involve the existing clearinghouse system. There are few reasons to retain cash transactions, and criminal enterprises are increasingly already transacting in digital currencies and gift cards rather than money laundering with actual paper currency. This would leave only commemorative coins being produced, but could trigger hoarding of common coins as well. The United States is extremely stubborn in payment systems, and may well lag behind other countries in doing this.

8. Democratizing sales and pricing data

A common frustration of consumers is that dealers will not pay them what they think their coins are worth. Searching for coin values via a simple search returns many bad resources for coin values. The few which are accurate use retail pricing, and there is little transparency to consumers to wholesale pricing. The greysheet has been the ubiquitous source for dealer-to-dealer pricing, and effectively consumer-to-dealer purchases for years, but consumers don't have free access to this. I predict that new data sources will emerge which will show dealer-paid prices to consumers for common coins, and will promote transparency to bid-ask spreads, along with more frequently updated data based on known marketplace sales. The market for data will move towards the higher-end certified coin market, with new multipliers for eye appeal, beyond CAC status.

9. International sales dramatically increase

The rise of the middle class in developing countries like China, as well as developed countries in the Middle East and Europe will fuel consumer demand for rare coins. US-based dealers who may have shied away from international sales in the past will have to adapt to their consumers, and learn to transact in a global marketplace. Certified coins with high rarity will be seen as investment products in those markets.

10. The Mad Coin Dealer continues their blog.

This is the Mad Coin Dealer. Leave your ethics at home.

[madcoindealer]

Explorations in overselling and alternative fulfillment models in the  wholesale numismatic market

Recently I came across a dealer who I suspected sold a relatively commoditized bulk quantity of coins without actually having the coins on hand. I found this a bit unusual - and it wouldn’t have been immediately obvious - if they could have fulfilled it sooner instead of stalling for time (and they never admitted to it). Today I’ll be examining what I think this dealer did, and examine alternative fulfillment strategies that differ from the traditional model or consignment that consumers who interact with a retail dealer may see. Finally, I’ll touch on what I think the dealer should have done, and what I see for the future of numismatic logistics.

First let’s step back to examine a few practices that are in wide use in the non-numismatic retail marketplace. There is drop-shipping: this is the practice where online retailers do not have a product on hand - when the customer places an order, they immediately place an order to a vendor which has the product at a lower price than what they’ve sold it for. The order is placed such that the return address reflects the real vendor, and the shipping address is that of the end consumer. Drop-shippers make money via arbitrage. Savvy consumers even act as market makers and can engage in retail arbitrage by noting a difference in prices in two online marketplaces.

There are fulfillment networks: for small vendors which don’t want to manage their own inventory, they can use a company like Amazon who is very specialized in logistics to rent space in a warehouse, and the labor to ship orders (Amazon’s FBA program is the most well-known)

Finally, there is white labeling, where a product is generic, and either before distribution, or upon sale - receives a label reflecting the branding of the vendor who sold the goods. Consumers know this as a store brand, but it can also be applied to any custom product which is “finished” after it is actually sold - like a trophy.

Numismatics is very primordial in the logistics space, in that most end vendors are very small, and fulfillment is done by 1 or 2 people, on demand, always based on inventory they have on-hand. There is also the challenge that every single product is custom, and would have its own SKU. Some products are managed in bulk lots when the individual item is inexpensive enough to not be worth the added labor and overhead of managing it individually. The complexities of managing a detailed system are so much that many dealers use cost-factor averaging for lots, and offer volume pricing that uses steps, rather than a curve - creating an inefficient marketplace.

I’ve touched on several cases where a dealer may be involved with inventory they do not actually own. Consignment is where a dealer will sell another dealer’s goods for a percentage, and to the end consumer, this may not be disclosed. The second is where the dealer acts as a market maker for a customer that has a want list. I will now introduce a new known market-making activity.

I believe that the dealer that is the subject of this examination was engaging in overselling and relied on a white label fulfillment strategy based on a relationship with an existing wholesaler - or may have had to turn to a bulk retailer. This was not the ideal strategy - because it led to a delay when the oversell occurred - and thus the customer (me) found out. In this case, the dealer placed an order with their wholesaler (probably larger than my order quantity), unpackaged the goods, packaged my quantity, applied labeling, and shipped. I know this based on the shipment tracking.

Overselling in the numismatic field would normally be unheard of - it would be like advertising on eBay and Etsy, fulfilling the order on eBay, but not pulling the Etsy ad - except - this was a bulk lot, and thus took on a commodity-like quality that allowed alternative models of fulfillment.

This was not the smartest decision by the dealer - because it caused delay, and it could have resulted in a cancelled order if there was any delay in the order to the wholesaler - or the wholesaler was out of the product (price lists and available quantities are not exactly programatically available in real time). If there was any price increase in the precious metals market - a day’s delay could have reduced profit to the dealer.

If I was the dealer in this case - I would have set up a drop-shipping, white-labeling, and price agreement with the wholesaler that would allow me to buy on-demand a quantity of coins of a given type and condition in bulk up to a given number, at a given percentage above spot price. The wholesaler would receive the order from myself and package a packing slip and business card indicating I was the seller. I would provide an advance fee to cover the shipping materials and labor cost - and the return address would indicate myself. This would result in a higher logistics cost than fulfilling it myself - but at the benefit of less risk than carrying a large commodity-tied inventory which I must hedge. The only way for the customer to know it was drop shipped would be to observe tracking or postal cancellation zip code. With priority mail, the difference in shipping from one coast vs. another coast could go under the radar.

There would also likely be a premium to pay to the wholesaler to reserve a quantity of items. From the wholesaler’s perspective, they also want to carry as little inventory as possible at a time - because fluctuations in commodity prices can be expensive, so they need to hedge in inverse funds. Wholesalers like APMEX bake this into their overall product cost (of note - I do not believe APMEX engages in overselling, based on their real-time inventory system and price-locking feature).

I see the future of fulfillment in numismatics going towards a centralized Amazon.com type model, where dealers are more often selling items they don’t have, and there becomes a group of individuals (not necessarily direct-to-consumer dealers) who specialize in fulfillment and market making. The idea of dealers holding coins for years (something I am heavily against) will be significantly shorted to months, and in an ideal future - days to weeks - as the market becomes more in line with modern fulfillment strategies. The use of real-time inventory levels, automatic price adjustment based on real-time spot quotes, and sophisticated systems for inventory management are all things I see being democratized to small dealers in the near future.

This is the Mad Coin Dealer. Leave your ethics at home.

[madcoindealer]

Strategies in Aggregation and Decomposition for bulk purchases

In a previous post, I briefly mentioned that dealers engage in aggregation of other dealers inventory for sight-unseen trades. I would like to explore the sight-seen bulk trading business, and introduce a term called “aggregation and decomposition”. This is a common variation of wholesale purchasing activity by coin dealers and generic vendors alike where we aggregate bulk inventory, and decompose it in an algorithmically efficient manner, such that the resulting individual sales and bulk sales result in the most revenue and an adequate inventory turnover.

One key opportunity for bulk aggregation is classic albums of US coinage: Whitman, HE Harris, etc. folders. Typically, these albums were assembled by collectors in the 1960s-1990s, and then are being sold off after inactivity. These can range from only common dates, to more experienced collectors who assembled a nearly complete collection, or may have used more permanent archival type storage such as 2x2 cardboard holders, or Dansco or Whitman albums. One of the many sins of coin dealers is that they will lowball a price on these types of bulk purchases, because it would take a lot of time to evaluate the wholesale pricing of 30 to 100 coins. Dealers therefore use a heuristic and look for key and semi-key dates, and then extrapolate non-key dates as if they were the most common dates. This can result in the overall set being valued at melt value, and a huge gain for the dealer if the customer agrees to that price. This may work for small time pawn operations or unknowledgeable persons, but for persons within the industry, it leaves a sour taste as collectors feel that dealers are simply not interested in their coins by ways of a lazy evaluation strategy. A common date in a higher grade and thus commanding a price equal to a semi-key in a lower grade could easily be missed in a quick scan.

My strategy here has been to write software which quickly evaluates an entire set of coins and assigns a suggested set purchase price as a percentage of aggregated wholesale bid. Of key importance in the initial aggregation is to manage risk of any one particular coin in a bulk set, especially when that set may not be in the physical presence to closely examine the coin to view both sides, or view the coin at an alternative angle to examine for damage or improper cleaning. Thus, if a coin would result in an unnecessary risk, it is evaluated at a grade lower needed to bring the coin’s potential purchase price  of the set to an acceptable threshold (ex. one person’s risk level may be ‘this coin should only be a max. 30% of the set”). This results in each coin being assigned a apportioned purchase price at bid which over time should result in more common dates being assigned a value with less variation in profit, and semi-key and key dates resulting in a higher variability of profit and higher overall profit. On the decomposition front, this allows for assembly of sets and individual sales. Some basic statistical analysis can be used to determine the suitability of an assembled set from many decomposed sets. One key indicator for knowing whether to sell a coin as an individual component is the standard deviation of possessed specimens at this grade, and grade of this particular coin. Semi-key and key dates will not follow a normal distribution for grades; they are skewed to the left. (An interesting note is the 1909 VDB cent, which many were saved in higher grades, and thus does have a less skewed distribution) However, for these sets, one can expect that over a minimum test set of 30, you can approximate a normal distribution of each unique date/minmark’s grades. This can be a better indicator than the NGC population for calculation of rarity at lower grades, given that certification is unlikely for anything below $50.

A recent example: I was planning to aggregate a 1912 D wheat cent @ AU into a higher grade set. However, it was found that given the sufficiently large set of 1912 D cents, the standard deviation in grade was around 6, and the mean was around 20 (VF). This put the “extreme” variant at 38 (near XF), thus a AU would be deemed highly unusual for the coin. When examining the proposed set as a whole, this and 5 other coins examined this same pattern of extreme deviance, thus were marked for individual sale instead. From a psychological perspective, allowing for less deviance in a set as a whole also allows the new set to be sold at a less surprising price, given that no explanation would be needed for why there is an extra $100+ added on for a few deviantly graded coins.

Decomposition strategies are used by many big and small vendors on eBay when sets are offered that revolve around a theme, ie. “all years of Buffalo nickels” (mintmark not specified), or “all 1920-1929 wheat cents minus 3″. These allow newer collectors to start assembling a set while allowing a relatively stable profit over time from tightly packed variance in sets. For even a smaller volume of business, automated software is needed to calculate statistics as well as track profit per coin. If dealers do this manually, they either truly do not know their actual profit, or they spend a lot of precious time tracking a few literal cents.

This is the Mad Coin Dealer. Leave your ethics at home.

[madcoindealer]

eBay completed listings: a practical example in natural oscillation in the rare coin market

Recently, I had noticed a particular group of two young men who visit shows with a tablet, and either have an extraordinary knowledge of the particular certified coins they are looking for, or are naive at the prospect that wholesale pricing is not achieved in this type of marketplace.  Usually, they will ask to see a few certified gold or silver classic coins, and then look up the prices of completed listings on eBay - presumably to pocket a small percentage by assuming that this piece will sell for an equivalent price.  Smart business or unrealistic thinking?

The dealer has access to this same information, and in a perfect marketplace (in classical economics), they would price their goods very close to this figure - assuming the most completed listing is recent.  However, that is not always the case because eBay completed listings have more variation than is reported in PCGS CoinFacts or NGC Coin Explorer.  If a dealer relies on completed eBay listings as their sole pricing source, they will at some point sell themselves short - a consequence that these young men are preying upon.  This swing in the completed listing prices for comparable or near-comparable pieces is what I deem "natural oscillation". I have only mentioned the term "natural oscillation" in two prior blog posts - but only explained it as an accompaniment to arbitrage as a type of short term speculation in the coin market.  In "Selling Coins is like Selling a New Car", I discussed the potential that a cleaned raw coin could sell for more than an uncleaned original specimen.  In general, the greater the rarity of the coin, the fewer completed listing results, and the greater magnitude of natural oscillation.  This oscillation occurs at a greater magnitude for raw coins than for certified coins (to be explored later).  It should be clear that the magnitude I reference is in relation to the percentage of the overall coin's selling price.  The dollar amount variation despite lower amounts of natural oscillation will be much higher for high-end certified coins.  This is why many dealers, once they have the financial means to do so, concentrate on high-end rarities which have lower profit margins, but have the potential to pay for the month's rent with a single sale. We're going to take a loo at the natural oscillation on completed listings of a fairly common coin in certified conditions, at a specific grade:  A 1909 VDB Lincoln Cent in MS-63 condition.  We're also going to have to break this down by the copper type designations:  Brown (BN), Red-Brown (RB), and Red.  According to the PCGS Price guide, the census population is as follows:

BN: 495 / $45 RB: 2660 / $75 RD: 5669 / $90

Let's scan the eBay completed listings for PCGS certified examples in the past 60 days. I've done a bit of filtering to get 52 examples.

Our first finding is that the PCGS certified examples have an enormous range:

BN Range = 26.89 - 46 = 19.11 split

RB Range = 31 - 59 = 28 split

RD Range = 46.19 - 75.21 = 29.02 split

Let's look at the medians and medians as a percentage of the retail price (RPP).

BN Median: 32.50 / RPP = 72.2%

RB Median: 41.88 / RPP = 55.8%

RD Median: 58.01 / RPP = 64.5% This is a rather interesting gauge at the differential between actual completed auction prices and PCGS's retail prices.  If there were published Bluesheet values for each of these variations, that may be a better guide as to the discount that eBay provides, because eBay is one of the few ways that regular collectors may acquire pieces at dealer wholesale pricing. Natural oscillation is a means of profiting by targeting the purchasing of a standard YMV (Year-Mint-Variety) combination coin, and allowing the odds to dictate themselves such that in x % of sales, the sales price would cover the expenses plus the original cost of the coin.  The most common way to target this is by using some basic statistics and assuming a normal distribution of the sales prices, and calculating the standard deviation.  Let's calculate using a "Off by 2" method the average profit you could expect to make on each of these  BN Mean and Standard Deviation: 37.47 / 7.51

RB Mean and Standard Deviation: 43.76 / 6.98

RD Mean and Standard Deviation:  59.95 / 8.73 In a normal distribution, the empirical rule states that of all values in the distribution (sales prices), 95.45% of those values will be within 2 standard deviations of the mean.  Therefore, we want to target the 5% of coins that will sell for this price or less: BN:  22.45 RB:  29.8

RD:  42.49 "Wait a minute!  These are highly unlikely selling prices!", you say.  Yes, it is true that there were no specimens of the appropriate color designation that sold for those prices.   In fact, attempting to reach these sales prices will probably result in a much longer wait time and see greater than 20 appropriate samples pass by outside the acceptable purchase price.  That also being said, we had a sample size outside of the recommended size for such a distribution. Our unrealistic buying prices may be due to our distribution being non-normal, but skewed to the right.  For a given condition, there is some theoretical floor, but individual coins may vary in condition even within the MS-64 range.  There is a great difference between an ugly toned technical MS-64 and an "Original Green" or "rattler" holder with a MS-64 coin that will garner a MS-65 prmium.  Let's instead change to offset 1.5 standard deviations.  Now, there will be at least one existing datapoint for RB and RD that are within range. BN:  26.21 RB:  33.28 RD:  46.83 Keep in mind - the distributions discussed here only work for coins that are immune to the bullion floor.  Most certified coins fit this definition, but I would recommend against a simplistic approach for a coin which relies on mostly bullion values (such as uncirculated, raw Franklin half dollars). Now, in theory, when we purchase, 13.4% of coins will sell for a lower price.  And when we sell, there is a 86.6% chance the coin will sell for a higher price than what we paid for it.  These are all theoretical - I cannot stress enough how much this would be for the long-run auction.  For example, the chances of flipping a coin heads 3 times in a row does not mean that this coin over 2000 flips will land heads every time.  It is likely it will be within 50.5 percentage points one way or the other.  If we're reselling in an auction environment, we'll need to be cognizant of the expenses involved.  Let's use an RB coin as an example.  We purchase the coin at our maximum buy price of 33.28 - still, a great deal.  We can expect the coin to sell for $43.76 on average.  Given an eBay+PayPal fee structure, our average fees will be $3.93, and our average shipping cost will be around $2.25 given all supply costs as well.  Our average profit per transaction will be $4.30, or around 9.8%.  That's pretty good considering the average margin for secondary certified coins is lower. "Your results may vary".  Indeed, when dealing with this sort of statistical trading game, it is possible that due to adverse selection or any number of eBay follies, your item will sell for less than the average price, or will even sell below the price you paid for it.  A better solution for natural oscillation exploitation is to buy coins at auction and sell them at retail for the average auction sales price, or higher.  This insulates us from the chance of a lower sales price, while still guaranteeing a relatively quick liquidation.

Let's also be cognizant of the actual specimens in each example.  While all certified coins here say "MS-64" on the label, it's best not to read into the label too much.  Our recommended buy price is for an average example, and while you may be tempted to buy a bargain, ugly toned example, it's not likely to play well for the natural oscillation game. Going back to our original examples, the two young men were in fact attempting to garner completed listing, lower-price-level auction type prices at a physical retail-type outlet.  It is probably unlikely that they scored a deal.  I'd recommend they try out the eBay market, rather than trying to cozy up to certain dealers. How does the eBay market affect the retail pricing guides?  How much different is natural oscillation on the raw coin market as compared to the certified coin market?  All in good time I will address these issues. This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

Shady Business or Effective Marketing?: Dealer notes and codes on raw coin holders

In the raw coin market, coins are commonly sold in 2x2" mylar holders.  This is done for the sake of both the buyer and seller, and is primarily used as a barrier against fingerprints, and to provide a standard holder size for cases.  Another primary function is to write in larger, more legible text, the Year-Mint-Variety (YMV) of the coin, for easy identification for those who are physically browsing, and are not online shoppers where these attributes are more easily conveyed outside of an image.  There are many more items which may be found on the mylar holder, which include inventory codes, promotional text, suggested  pricing levels, and grade. -Inventory Codes:  These are used internally by the dealer and usually are a ciphertext of either the price the dealer paid for the item, or the price the dealer is willing to sell the item at.  Both of these are horrible approaches, and are a major constitute towards why coin dealers have large amounts of static inventory.  These written codes lock them in to a potentially unreasonable selling price, or move the goalposts each time the coin appreciates in value.  In addition, if a dealer chooses the approach of 'Sell Price', the coin will require a physical revisit each time the price should be increased.  This is an unnecessary overhead cost.  An additional downside to these methods is the potential for cracking of the cipher - make a few notes on a few coins, ask for some prices, and do some research, and you can with a little brain power, reverse engineer the cipher to be able to get a more optimal price for this dealer's inventory.  Most ciphers are simple:  a 0-9 matching of some arbitrary text like the dealer's name, their business name, or a word. A better approach to inventory coding is to use an external SKU, with no relation to pricing.  As long as the customer doesn't have access to this secure system, you can look up the pricing information each time and make a more optimal call for the selling price, and a more quantified answer as to the liquidity of comparables.  An integrated inventory, sales, and forecasting information system is indispensable for this type of operation. -Marketing Text:  This can range from the simple factoid to outright wild speculation.  In a sea of Peace Dollars, marking the 1921, 1928, 1934-S as "KEY DATE" would be market acceptable.  Likewise, marking the 1934 as "LESS THAN 1 MIL" would also be market acceptable, because it is still marking an exception, given that there are only 4 YM combinations that fit this qualification, or 16% of all Peace Dollars.  The gray area is when promotional text either infers future value of the coin, or common date coins receive promotional text that distorts the potential buyer's perceived rarity of the YMV combination.  Placing "RARE DATE" on a 1924 Peace Dollar, or "90% SILVER, PRICES KEEP GOING UP" would not be market acceptable, in my opinion. The degree to which gray area marketing text is accepted vastly depends on the market.  The eBay and casual consumer markets tolerate this to a much higher degree than the coin show circuit or the archaic brick and mortar market.  Online, the perception will vary depending on the target market and price range of all available coins.  Consumer-oriented eCommerce sites may graciously benefit not from the text on the holder, but the ability to place header text anywhere on the page, and to A/B test the effectiveness of the text and location thereof with any number of user-defined metrics or goals.  These goals could measure additions to the cart, time spent on the page, or bounce rate. -Suggested Pricing Levels:  Writing the suggested selling price of a coin has both advantages and disadvantages.  The advantage for the dealer is a potentially higher selling price to the coin collecting consumer.  Many amateur collectors dislike negotiation and this can make them feel at ease.  It is advantageous to the consumer in that it allows them to get a quick view on the dealer's average pricing.  By picking a few common date coins, the consumer may easily get an order-of-magnitude estimate on the dealer's overhead, and even their estimated buying prices.  Pair this with a dealer inventory code, and you've figured out the markup on the raw coin. Set pricing is disadvantageous to the dealer in that the set price may give off the impression they are unwilling to negotiate, and this will cut into sales for those who are willing to pay a lower, but still reasonable market price. This generally applies to consumers.  Dealers will attempt to negotiate despite marked prices or even marked language indicating "firm" or "no negotiation".  Dealers who reject negotiation are responsible for the accurate perception of static inventory.  Set pricing is also disadvantageous in that coins must be constantly monitored for market changes.  Re-holdering coins becomes necessary, as we don't want to cross out old prices, or place a new sticker over the old price; this looks bad in the eyes of the consumer.  The re-holdering of coins becomes a necessary overhead cost in materials and labor.  Re-holdering the coins with a new price in turn leads to less inventory turnover and cash flow.  Not adjusting the price may lead to the awkward situation of selling a coin at less than a wholesale price, or rejecting the holdered price, and losing the trust of the potential buyer. I recommend the removal of set pricing on holders for the reduced overhead, and greater liquidity of inventory.  It's well known that I prefer to have a high inventory turnover to compensate for lower, but acceptable margins.  Using set pricing may gain a few dollars from negotiation-averse consumers but there is enormous opportunity cost resulting from having longer holding periods waiting for this elusive consumer. -Grade:  This is the marking which will cause the most fluctuation in the price, because it represents the dealer's base for wholesale pricing.  The marked grade on a coin has nothing to do with the grade the dealer actually believes it is, but is to represent to the consumer where pricing negotiation should start, based on the acceptable profit margin.  As a consumer, attempting to argue with a dealer's grade on a marked coin are generally futile.  It is good business to generally maintain the grade of a coin which is overgraded, and lower the price in the name of "giving the customer a good deal".  A few eBay sellers do this to the extreme, routinely marking AU-55-AU-58 Morgan Dollars in the MS-63 to MS-66 range.  "Grade markup" of coins is expected and accepted, but as with all things, must be practiced in moderation to be effective.  Especially if a dealer is involved in the wholesale or dealer-to-dealer market, they should refrain from marking raw coins with a perceived grade.  To ease online sales, it may be best to crop out holders if marking a grade, or simply to leave out a marked grade entirely, and simply state the grade elsewhere on the page. This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

eBay: The elephant in the room and the secret to profitable coin dealers

A lot of time I hear this in-person from coin dealers or collectors:  "I don't own anything from eBay.  I don't have that low quality junk".  Well, sorry to tell you, but you do - you just may not have bought it first hand from an eBay seller. eBay in the professional dealer realm is hard to ignore.  Few endpoints attract the amount of casual and serious collectors needed to sustain the industry.  eBay is also a major source for the wholesale market, offering occasional deals that get close to closed-doors wholesale dealer-to-dealer pricing.  The raw coin market, where I specialize and where the majority of the cash flow is made for all dealers, is the most prominent on the website.  eBay is continuing to expand their partnerships with MCM, APMEX, and high-end outlets for certified and CAC coins.  While the trend for wealthy investors will continue to revolve around the low-profit bullion and secondhand certified markets, I do not expect that the raw coin market on eBay will suffer as a result. For every good deal on eBay, there are at least 25 that are on-par or higher than collector retail pricing.  This makes it both an opportune environment for buying and selling, given the large swing in realized prices for equitable pieces.  All of this considered, most dealers do not purchase common dates from eBay raw because the overhead costs are too high.  More often, the deals are made on jump grades, semi-key dates, coins with repair potential, or gambles regarding photo quality.  There is even more inventory that has been cleverly disguised and photoshopped to mask obvious flaws such as scratching, discoloration, residue, wear ,and hairlines.  When dealers remark about the difficulty of obtaining quality pieces through eBay, this is what they refer to.  It is likely that these dealers never used the site, or are not technologically adept.  To the professional, these sellers are readily identified, and dealers should use confidence intervals to estimate the risk of receiving a coin with a grade less than acceptable given the split between grades.  Photo manipulation software should also be used to get a different view of the coin, to detect hairlines, doctoring, or intentional masking of flaws.  Through the past 3 years, I would say that about 3% of my purchases resulted in an adverse selection, but in all but 2 cases, the resale value covered the gross expense.  As always, when an adverse selection is made, these are sunk costs, and it is important to liquidate as soon as possible. Raw coins on eBay are also an elusive source of high-value original collections (HVOC), which I have discussed before as one of the key necessities to maintain cash flow for coin dealers.  While the majority of sellers for raw coins on eBay are dealers, approximately 10% are amateurs, and of these, about 30% represent high-value original collections.  These types of auctions vary widely in the amount of competition they attract by means of image quality, description, and types of items.  However, by targeting both amateur sellers and high-value items, it is easily possible to resell the same item in 60 days (to avoid the bargain price from appearing in "sold" listings) or to resell immediately through another channel (arbitrage).  Buying, documenting, doctoring and cleaning (if necessary), listing, and recording a sale can still leave enough room to double your money on these types of sales.  Much of this draws similarities to the consumer "flipping" of real estate - except unlike the real estate boom of 2005, it is always possible given the right inventory is being listed.   Dealers who obtain eBay goods from both other dealers and amateurs invariably resell these goods through their own outlets, and with no disclosure as to the source.  I can, and will make up the source of goods as "an elderly gentleman" or "a good friend selling his collection", when the source is actually a wholesale lot purchase from eBay.  Unless the items are obviously cleaned beyond "repair" (which you shouldn't be buying, anyhow), this is a viable option.  Smart dealers know that it is essential to let the customer know that they have a "secret source" of goods that is non-obtainable by the customer or other dealers, that allows their goods to be priced less than the competition.  In this way, preaching the evils of eBay is actually a good business practice to assure the customer of high quality control.  Thus, through this transaction, or one or two down the line, questionable eBay inventory ends up in the hands of raw coin dealers who despise eBay.  I would estimate of the coin dealers whom do not purchase items from eBay, approximately 15-25% of their stock passed through eBay at one point in time.  I do not claim to purchase items from eBay as stated, but approximately 50% of my current inventory originates from there, and even more may be secondhand. This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

The secret, underground world of middle market coin dealers

In this article, I'll explore a topic that may have fewer published articles and forum posts in numismatics than even the more elicit ways of cleaning and doctoring coins. We're talking about the lucrative, and secret world of middle market coin dealing. Here, the lack of online resources isn't because the resulting product is more profitable than any other numismatic product, it's because there are so few people actually engaged in the business. I would estimate that there are less than 150 middle market coin dealers in the United States, and even that may be a liberal estimate. Yet, each of these middle market coin dealers probably brings in at least $150k a year in profit from their goods. It's safe to say if you've become a middle market coin dealer, you are doing well financially. However, you won't get a Vice documentary out of this: no middle market con dealer would go on the record about their activities, because the open secret is that many of these middle market dealers, like bourse-only dealers keep inadequate financial records that are either intentional are unintentional, and may involve crimes such as money laundering, tax evasion, illegal shipments, and tariff avoidance. It's a tale of off-the-record, no physical mailing address, six figure deals, that much of the greater public has no idea occurs on a daily basis.

Our adventure begins with a tale of supply chain management. This particular fall day I had overheard the tale roughly going to the tune of this: "Four rolls (200 coins) of 1909-VDB S Lincoln cents in the roll were sold, and the dealer who certified them had them all come back as (MS) 64's and (MS) 65's. Who even knows where that comes from!?" Well, today we're going to give that story our best origin estimate.

It is true that in a long occasion, extreme high value original collections (HVOCs) do come to market that contain original bank wrapped (OBW) rolls. However, each year the number of OBW rolls in HVOCs decreases, and it decreases in relation to the inverse harshness of the macroeconomic climate. Simply put, in the current situation, there aren't a lot of HVOC OBWs coming out, because the nationwide economy is doing well. In a year like 2011, you could have seen tons of high-value OBW Washington silver quarter, Franklin half dollars, and Roosevelt dime rolls being sold second-hand from the usual outlets.

Let's first determine if that dealer was pulling our leg. The 1909 S VDB Lincoln cent is a rarity. It has the lowest mintage of the series,at 484,000. It is not however, the rarest coin at a MS-64 or MS-65 price point. The 1914-D cent is 2-3 times more expensive in equivalent grades. There's a slight detail missing from this story which impacts the price greatly: the Red/Brown designation. Red 65 examples sell at a price two times that of a 65 Brown. There's also Red/Brown, which you can imagine, is in the middle. According to PCGS census records, there are 3,047 examples in 64, and 1702 examples in 65. We're not considering the entire market. NGC probably has these figures to 75%, and IGC and ANACS combined of 5% of that figure (many continue to be cracked out and recertified under "top-tier" services). Our "spoiled" estimate for certified pieces is now at 5,485 pieces for 64, and 3,064 for 65. We all know about the problems of accurate censuses for certified coins, given the crack out game. Without developing a new mathematical model for likelihoods of crackouts, my back-of-the-napkin estimate lands us at possibly 75% of that figure. There is quite a lot of incentive for crackouts between these two grades, so we'll give a liberal estimate. Our adjusted figures are 4,114 examples for 64, and 2,298 for 65. Well trust the dealer in that "all" examples were in the 64 to 65 range, and they were distributed using the same distribution as their peers. So, 55.5% (111) will be 64, and 44.5% (89) will be 65. That means that this hoard acquisition will affect the outstanding certified population by 2.7% for each grade. Of course, this is also assuming that this is following the current distributions for R/RB/BN designations. If the dealer would have stated they were all Red 64s and 65s, I would be suspicious because that would impact the known examples by around 10%. However, I will keep our assumption and will cede to the dealer: this tall tale seems plausible.

Getting back to our original question - where does something like this even come out of? Some guy with a bunch of his grandfather's coins? No. That kind of thing only ever happens with CNN. More than likely, this came from a former coin dealer or banking executive who sold the item through any number of endpoints (think high-profile jewelers, or asset management friends) but it almost certainly went through a middle market dealer before arriving at the dealer who actually had the coins certified. Between the original buyer and the collector looking at this item, there is a lot of profit to be made. Each one of these HVOC-based OBWs rolls is worth at collector value $125,000+. Put together 4 rolls, the deal is half a million dollars. As I've stated before, there is not a lot of profit to be made on certified coins at the collector level under normal circumstances. However, we have a few transactions going on here when the product was still raw. Let's break that down and profile each market participant.

The seller: We've already profiled the type. They have probably kept these rolls for some time, and it would almost would need to have been inherited. Even in the 1960s, this type of roll would have been split up if ever offered for secondary market sale.

The initial buyer: Due to the high profile nature of the seller, and the need for trust in such a high-dollar transaction, the initial buyer was probably not a coin dealer, but a high market jeweler that knew the middle market buyer. We're also making the assumption that the roll was broken up and inspected at this point by someone who at least knew the basics of raw coin grading - they would be able to at least get a rough estimate, even if it was from a part time appraiser. They probably purchased the rolls for 75% of wholesale (raw) bid price at MS 63 grade, and even that is liberal. That's $1013 per coin, or $202,500 for the whole lot. We've got $300,000 to go. You can see where this is going.

The middle market dealer: This is the equivalent of the "guy who knows a guy", and the focus of our story. He has an existing relationship with the original buyer, and will purchase these quickly. The nature of business at the original buyer is that because of the large transaction amount, they will be willing to accept a smaller margin. By "small", I mean 15%: this is below standard in typical brick and mortar coin dealing. We'll say the coins were sold to the middle market dealer at $1195 a coin, or $239,000 for the lot. This is still a nice $36,500 profit for the original buyer, for nothing more than facilitating a transaction. The real money is made by the middle market dealer, because of their grading skills - they have adequate knowledge to estimate the intricacies of a MS63/MS64/MS65/MS66 grade on each individual coin. Could they simply send the coins in for certification and make a huge profit? Yes, but there will be difficulties of finding someone to buy $450,000 in this type of certified merchandise. It's better to sell this in a raw state to another dealer, on the selling point that the dealer could make a lot of money by certifying these. The middle market dealer walks through each coin in its raw state, and separates them out into lots based on estimated certified grade, and preferably with a confidence interval. The dealer very accurately estimates the collector certified sales price at $500,000, but convinces the potential buyer that this could be a lot more than that. We'll estimate that our original dealer buys at 85% of wholesale raw bid at MS-64 for $1828 a coin, or $365,500 for the lot. The middle market dealer just made a profit of $126,500 for a few hours work. To put that in perspective, that's a Mercedes Benz G Wagon. Where does a $300k deal go down? Given the nature of the business, probably somewhere like a hotel and involving a suitcase of $100 bills.

The original dealer: He paid $365,000 for the lot, and still has a lot of wiggle room. This is what most people think of as the middle market dealer, because he sold the item to our end point dealer. However, this dealer may also have a retail business, and unlike the middle market dealer, has to report his income. This dealer also has the most work to do. While our middle market dealer made a car-sized profit in a few hours work, this dealer will actually be sending the items to PCGS for certification and locating buyers for 200 $2000 coins - not exactly an easy task unless you are well connected. They have the greatest risk for time value of money. Although they can afford to drop $300k on such a large purchase, time is of the essence in selling this lot, to be able to concentrate on other deals. The costs for certifying the coins will be $8,000 (estimate). Based on what I saw at the secondary dealer, each of this dealer's non-consumer buyers will be interested in purchasing 5-10 examples. This dealer's markup will be 12% after certification cost. This is a pretty penny in the world of certified coin sales. At $1,868 after certification, the sales price will be $2,130 per coin. That's a lot sized profit of $52,904. Yes, he made $50k in a few weeks, but there was a lot of phone calls, emails, and haggling involved. Futhermore, a paper trail has been put in place, and this dealer probably has a legitimate business. Therefore, after capital gains taxes, the profit will be sizeably smaller.

The secondary dealer: This dealer has purchased a lot size of 5 MS-64 RB coins, for instance (given our "most likely" candidate used in the example up to this point). This dealer does not have a lot of wiggle room, as is rampant in the certified coin industry when the coins are obtained second-hand. They mark up the coin 6% for a sales price of $2,265. Not unreasonable for a show price to the consumer. Their lot sized profit is only on the order of $700.

The consumer: Purchases the coin for $2,265, for their collection. Possibly an enterprising third-tier dealer who has a connection, or sees opportunity for arbitrage.

From the start of the process to the end consumer, we marked up 200 coins at a most likely grade of MS64 RB from $1,013 to $2,265. Where did that money get distributed to?

The initial buyer: $182 The middle market dealer: $633 The initial dealer: $262 Certification company: $40 Secondary dealer: $135

The middle market dealer made more money in this multi-week deal than all other parties combined, for a few hours of grading and making two connections. Now, that's a story for the ages.

How prominent are middle market dealers in common sales for coin dealers? I would estimate that of all HVOCs in the United States, approximately 20% go through these types of underground middle market environments. While that may seem like a lot, the large majority of inventory in coin dealers' inventories is not from HVOCs. It is hard to estimate the total economic activity of said middle market dealers, because estimating the percentage of HVOC-sourced items in all dealers' annual sales is also difficult.

Acquiring a relationship with these key middle market dealers is absolutely essential to gaining competitive advantage for any coin dealer. There is a distinct line between dealers and consumers and dealers treat themselves as an "in-group" when it comes to offering wholesale acquisition pricing to their peers. Once one establishes themselves as a dealer and gains references, they will then have access to lucrative deals that are simply not possible under every day circumstances by the consumer.

The ultimate takeaway from this is that a small, but critical piece of the numismatic trade in the country does go through unregulated, potentially untaxed environments. Consumers who think of themselves of deal-makers and arbitrageurs are small time game compared to these middle market dealers who can potentially make a years salary in a few hours. All's fair in the game of numismatics.

This is the Mad Coin Dealer. Leave your ethics at home.

[madcoindealer]

"Know any rich guys?" - A lesson in client aquisition for numismatics

It's the hobby of kings - but the real kings are those who sell to the kings with very little competition.  No, I'm not talking about government contracting.  Today I'll be covering one of the most important topics in retail numismatics - client acquisition.  The demographics of serious coin collectors are the hallmark of what luxury marketers look for when selling a product.  Persons who are willing to spend $2000 for an item that has no utility, and only serves as a piece to showcase their wealth generally have lots more of those hundred dollar bills in their bank accounts.  It seems like the perfect industry for someone just entering the workforce.  Start with the scraps that are thrown out by the neighbors binging on caviar. Sarting a numismatic business is a difficult adventure, and the single most difficult part is client acquisition.  Drawing a parallel to car sales, in the beginning of your career, you need to lie, cheat, and steal to get to at least a comfortable position.  You need to pull out all the tricks in the book:  playing middle grade coins, cleaning and doctoring coins, selling questionably toned coins, and buying high-value original collections (HVOC) at blowout prices from the clueless public.  You are the slick used car dealer.  You're working a lot of hours to scan for inventory, catalog inventory, and sell to lower channels that guarantee cash flow, like eBay. Not every dealer starts out like this.  In fact, very few do.  Many coin dealers are generational dealers who already have a foot up in the industry.  Or - they may have some amount of wealth (although they'll vehemently deny it), and are able to skip this critical learning stage. Once you're selling more expensive coins, we start to transition into a difficult place:  the market for more expensive coins is constrained, and our cash flow is going to suffer if we take in coins with the premise of selling them to auctions or offline sources.  And, as I've mentioned before - lots of coin dealers have problems with cash flow.  Oh, sweet irony.  However, the potential benefits of entering the mid-tier numismatic market are large:  selling a $2000 coin for a $200 profit versus selling 10 $100 coins for a $200 profit means that profit margins are reduced, but at the end of the day, you'll work less on inventory management, shipping, and overhead costs.  This leaves us with a few options: 1.  We network with other professionals to gain potential referrals to our business.  While it may not be as blunt as asking "Know any rich guys?", it may be a case of asking a lawyer if he knows of anyone with an interest in the hobby, or a financial advisor if a client is looking for alternate asset investing products.  Our background and wealth has a lot of influence as to our success on this front.  If you happen to know some hedge fund mangers or mesothelioma lawyers already, you shouldn't even need this advice. 2.  We market and advertise heavily to break into the sector.  This has the disadvantage of having a lot of upfront cost, with delayed reward.  Finding the right channel for your service, and at the right price can be difficult.  3.  We sell at fixed prices with the assumption people will find us.   It's not as easy as it sounds - while people do buy $2000 coins on eBay every day, they are usually bullion type investors and other dealers which purchase these coins.  Marketing retail websites from the ground up may have high startup costs, too - and no guarantee of results in the even shadier industry of SEO and content marketing. 4.  We sell other peoples' goods.  This is just as shady as the techniques we use in our learning stage, but even better.  Gradually, coin collecting is becoming a sight-unseen business.  As long as a coin has a TPG grade, it can theoretically trade without photos.  The idea is we engage in the aggregation of other dealers' inventory and sell it sight-unseen as if it were our own.  This has the advantage of reducing inventory holding costs, and eliminates our cash flow problem.  It also allows us to offer a more varied and complete inventory than if we were to truly hold coins in inventory. It is drop shipping, applied to the numismatic world.  Dealers do this all the time, but the degree to which they use technology to accomplish it varies drastically.  The advantage of selling other dealers' coins as if they were your own allows us to follow our #3 point:  we can advertise at fixed prices, and place less emphasis on active client acquisition.  This gives us more of a potential to focus on online client acquisition and marketing. It is no surprise that I actively engage in pseudo-consignment type actions, and I believe that if marketed correctly, it can serve as a stepping stone to the final tier - client loyalty.  Once a client has earned the trust of their advisor (you), they will keep coming back to their source for their numismatic needs.  It also gives us the needed cash flow to move up to high-value numismatic sales.  There is no official definition, but I would place $20,000 as the starting price of a coin in "high numismatics". Here, a blemish on a coin can make the difference of the price of your average family sedan.  However, that's a whole different world, and best saved for a better post.  Stay schemin'. This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

Channel arbitrage and short term speculation in numismatics

I propose the following question to the coin dealer community: "As a non-dealer, can the consumer buy a coin from one dealer, sell it to another dealer, and make a non-trivial profit, within a short amount of time?" One would instinctively say "no":  dealers generally are several steps ahead of the consumer, and a pricing error this large, when the coin is priced at the point of sale would seem to be impossible.  We already know that the market for rare coins is rigged against the consumer and that dealers have a large incentive to not provide for wholesale pricing, even to high-volume consumers. Let's address the issue of the pricing gap, first.  How large would the pricing gap have to be to allow for two discounts before cash flow?  The coin needs to be priced in such a manner that the offer price of the second dealer is high enough to cover the original purchase price, plus a profit percentage or amount that is reasonable to the search cost and time value of money involved.  This "reasonable profit" amount is going to vary, considerably.  Dealers need to consider their working hours as paying wages to themselves, even if they don't actually sell anything.  They also need to assign some actual costs to their lack of liquidity, as a result of this purchase, for the given holding period.  I've touched before that coin dealers are notoriously stingy and illiquid in how they view their holdings.  When we assign these costs, we will have a reasonable idea of how much money we are actually making, and if it's worth it.  Let's run through an example using a brick-and-mortar style dealer, and evolving as we learn lessons. Our Example:  We are dealing with a common date uncirculated Morgan Dollar where we predict the final dealer offer price will be $38.  We know that our search cost for an in-person dealer will average 15 minutes.  We're going to average 15 minutes with the assumption that we're dealing with a lot size of 4, and travel and search cost will round to 1 hour.  We're going to say that this purchase was bought and sold within 30 days, and using a credit card, and the credit limit was not a limiting factor at any point during those 30 days.  We're going to pay ourselves a nice "full time coin dealer" type salary of $100,000 a year.  (The question of "how much does a coin dealer make" is reserved for another entry).  The average work week is 47 hours, so that pegs our gross income at $42.55 an hour.  We need to earn $42.55 in our 1 hour deal for this to be feasible.  Suddenly, this is looking grim.  At a dealer offer price of $152, we need to earn a 28% margin.  That's a reasonable margin for most items, but here it is not, because there is a floor to this equation.  Even though these are numismatically valued coins, at our desired profit margins, we need to start to factor in the melt floor.  All of a sudden, we've now put ourselves in the position of buying at $27.36 a coin.  We're only getting that price if we're buying from the end consumer, not the dealer.  Here, our example ends, with some valuable lessons: 1.  You can't just use arbitrage with any old coins.  You need to be very specific in what you choose.

2.  Your labor costs are higher than you think, even if you only want a part-time salary.

3.  Don't underestimate your search costs.  Especially in brick and mortar type situations, your search costs includes all the time you are engaged in business with this specific coin, time for cataloging and reporting, and transit time. Example, Revision 1: We've learned our lesson:  no more common date coins.  We're going to target the same location for sale, but with a more expensive coin, so we don't run into the same issue of the melt floor.  We're going to buy a 1883-CC Morgan Dollar in XF condition.  Better yet, it's XF-45 that was acquired at an XF-40 price - the other dealer may think it's an AU.  We acquire this specimen at $105.  That's the week's groceries, for Joe Coinpack.  We purchase this on a credit card, and want to sell in 50 days.  In 50 days, we go to the opposing dealer, and only receive an offer of $95.  What gives?  If we sell, we've not only had a gross loss, but our overhead involved in our own wage at 20 minutes time, plus time value of money from credit card interest is $16.  What didn't we consider here?  Some additional lessons learned: 1.  You can't just use arbitrage with any old coins.  You need to be very specific in what you choose.  Sound like a broken record?  I can't drive this point in enough.  Even though we had a graysheet split of $25 between the two conditions, we weren't able to get wholesale pricing on one end, and our buying dealer gave us 80% of bid (probably unrealistically good).  We need to target a coin in a mid grade with a large split between conditions.

2.  We need to liquidate quickly:  With a 24% APR on our credit card, we racked up unnecessary interest.  Many retail coin dealers are able to tolerate low inventory turnover because they are rich and their mindset is that some consumer will eventually buy it - but these types of people are flat out irrational. 3.  Consumers don't have wholesale pricing acquisition privileges in the brick and mortar channel.  We acquired this piece at the graysheet ask price, but that's unrealistic.  More than likely, this piece could have been acquired at $125 at a brick and mortar dealer.  We may want to consider changing our buying channel, selling channel, or both. Example, Revision 2: We've refined our technique.  We're going to target several coins at a variety of shops, and we are going to sell these coins direct to the consumer on eBay!  We've picked a couple of Morgan Dollars that have large splits between conditions, based on the graysheet and the consumer pricing guides.  We're targeting an 1883-S in AU/MS, a 1884-S in XF / AU, a 1885-S in AU / MS, a 1886-S in AU / MS, and an 1890-CC in AU / MS.  We spend several months waiting for this opportunity, submitting want lists, and browsing online inventory of these dealers, but all of the examples that arise are certified examples.  One day we get a call from a dealer that is an half hour away on the 1890-CC, which he declares is an AU+.  This looks good.  According to graysheet estimates, we've got a coin that can be purchased for around $190, sold for $460.  We visit the dealer, and see that there was some information withheld - this is an AU details slabbed PCGS example with a code for harsh cleaning.  The coin has lots of deep visible hairlines, but is an AU-58 example, otherwise.  We purchase the coin at $180, and liquidate it within 2 weeks on eBay.  It sells for a whopping $110.  We've lost $70 outright and an additional $42.55 in outright labor cost, plus possibly another hour and a half of search cost for those few months of passive searching, at $63.83.  It seems like this was the perfect storm.  How did it go so wrong?  Let's look at some more lessons learned: 1.  You can't just use arbitrage with any old coins.  You need to be very specific in what you choose.  We followed that advice here, but we fell into a pitfall of accepting a coin that didn't 100% fit our criteria.  Details coins are sometimes good candidates for arbitrage, but this particular one didn't fit, and its discount from the AU grade was significant.  If playing the reverse crack out game in certified coins, we need to be more careful. 2.  The good ones are already taken.  We spent a lot of time searching inventory, but there were few examples that matched our exact year-mint combination, with the type of grade split, and the wholesale-like price that we wanted.  The examples that were XF45 or AU55 were typically slabbed, and marked up to the collector level of retail pricing.  Someone else got to these first. 3.  Our search costs include time we don't think about.  Our "real" loss was almost as much as the price we paid for the coin, because we spent too much time actively searching.  We need to be more passive in our search, to minimize these unseen costs. We've also cheated in our example - we sold to the consumer market.  Still, the point here was to show these three lessons.  Selling to a dealer would result in even a larger loss.

Example, Revision 3 We've learned our lesson.  We're not going to be able to do this through conventional means.  We need to have a serious look at two things:  our buying and selling channels, and our time invested in search costs.  We're going to stray from our brick and mortar source, and expand fully into the realm of online auctions b dealers.  We're going to stick to our definition of "dealer to dealer" sales by only bidding on items that are posted by known dealers.  Furthermore, we're going to set up saved searches with alerts for only coins that explicitly match our grade criteria.  We're going to use a base of 10 similarly priced Morgan Dollars.  We receive around 10 candidates a day to evaluate, and after 2 weeks, win an auction for a 1889-S Morgan Dollar at an esimatd AU 58 at $110.  Already, we've garnered the ability to acquire this coin at near the wholesale level.  We spend 5 minutes cataloging, and 25 minutes in transit and selling this coin to a brick and mortar dealer for $150.  We've made an outright profit of $40, and at 30 minutes of overhead and 15 minutes of search cost, made a net profit of $8.09, while providing for our own salary.  Lessons learned: 1.  You can't just use arbitrage with any old coins.  Here, we not only chose the right coin, but didn't stray from our idea of perfection. 2.  Dealer to dealer arbitrage by the consumer is possible, but frustrating.  If you want to make serious money as a consumer in the dealer market, there are much better ways.  Consumer-to-consumer arbitrage will be much more profitable.  Keep in mind, we could have sold this same coin on eBay again - with a different description, some better photos, or a Buy-it-Now listing, and at a much better profit.  In keeping with the idea of the thought experiment, I restricted us as a market maker between an online dealer and a brick and mortar dealer. 3.  You can do everything right, but still fail.  This theoretical example could have ended with a loss in so many different ways.  Because we were at a single outlet, the dealer may have declared, "I already have a coin like this", and simply refused to purchase the coin.  The dealer could have been bad at grading this particular coin, and highly undervalued it, giving themselves a high margin for error.  The dealer could have some suspicions about you, for no good reason, and take the standard wholesale discount to 50% instead of 70%.  The list goes on and on. If this were Mythbusters, I'd declare this plausible, but highly impractical.  For dealers trying to break into the industry, this is a very unforgiving and risky area.  Channel arbitrage is a legitimate method of earning money, but I highly recommend avoiding dealers as either the source or the endpoint for the numismatic items. This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

How does self-declared professionalism relate to coin dealer types?

One of the interesting notes about the coin dealing world is that it's a legitimate business built surrounding a community of hobbyists.  As a result, there is a wide gray area between the amateur and the professional. However, there is a clear spectrum of dealers in terms of their background. On one end is the collector-turned-dealer.  This type of dealer becomes a dealer out of love for the hobby and the need to sell excess or duplicate inventory.  Acquiring inventory takes time, and as a result, many of these dealers are older, or part-time dealers, possibly having no business card, no website, and only attending a few coin shows a year.  These types of dealers may focus on only a specific series, as they are also the series that they have previously collected, or continue to collect.  Dealers in this category may or may not call themselves "professional dealers" or "professional numismatists", even though they may be part of professional organizations such as ANA, PNG, or a PCGS / NGC authorized dealer. What to target:  Coin series that as a percentage of the dealer's total inventory are low.  There is a good chance the dealer has mis-priced or mis-graded these, hopefully in your favor.  Acquiring series where one is not an expert is unavoidable in dealing, because all good dealers buy out lots and collections, not just individual coins. Any certified coins that are non-gradable:  dealers generally recognize a coin as non-gradable before it's sent in.  It's likely this coin was acquired, and originally sent in by a collector - and therefore, the coin was probably acquired at a hefty discount.  That discount may be passed on to you, if the dealer is looking to liquidate low-traffic items. What to avoid:  Coins that are the main expertise of the dealer.  These dealers leave no room for grading or pricing error, and therefore, no short-term profit for you. The Pawner:  While named for its namesake "pawn shop", the Pawner is a term I apply to all persons who do not concentrate on numismatics as their primary market mix in collectibles.  There are probably more "Pawner" archetypes in the US than any other category.  Sale locations can vary from the online business, to the strip mall, to the antiques or outdoor market (coins exposed to the elements boil my blood).  These persons may consider themselves professionals when asked, but know internally that their expertise falls under a broader scope than numismatics. What to target:  The "junk box":  while rare, their lack of knowledge may have lead to a valuable coin being falsely declared as "junk".  Price-guide-specific arbitrage. What to avoid:  Everything else.  These types of shops tend to be overpriced, due to the brick-and-mortar nature of their businesses. The broad-based entrepreneur:  This is the guy that is a multi-millionaire, and he'll let you know it.  I once knew a auto dealership owner who opened a furniture store - and openly declared that he knew "nothing about it", but" figured there's money in there" (not to me, but a newspaper).  People like this normally would get laughed at by the general public, but because their vast ventures in smaller cities create jobs, they are largely praised. I also tend to have a problem with these sorts of dealers because often the business owner has no active role in the business:  it's treated as a profit center.  Hiring a "coin guy" is a terrible idea, because these types of serial entrepreneurs tend to view salaries of "sales professionals" as much lower than they should be, so the quality of hires is low, and prices are marked up substantially by management, to allow for mistakes. Numismatics will certainly not be their first venture, yet these are the category of dealer that will more heavily advertise and promote their staff as professionals. What to avoid:  Everything.  These shops will be overpriced, and usually will feature only certified coins (which I have recommended against for most entry-level dealers several times.)  The multi-generation dealer:  Also known as your "spoiled, rotten, kid".  This is the guy that everyone loves or loathes, because their expertise is invaluable, but they know little about business sense, because there was no bootstrapping of the business.  They will almost always have some form of professional society affiliation. What to target:  The usual suspects:  jump grades, potential "improvement" coins, undervalued coins.  Supplies. What to avoid:  The other usual suspects:  proof sets, low-GP-variation coins, certified coins. The Enterprise:  I reserve this for companies that have focused solely on numismatics, and have grown enough to hire a full-time person, or open a second location.  That is -1 REAL employees - not contractors, not your family member, and the second location is not "The Internet".  The persons in charge of the grading and price points will certainly consider themselves a professional. What to target:  Dealer lots, closeout specials, introductory offers. What to avoid:  Anything else (mostly gimmicks, anyhow).  Show me an enterprise that has affordably priced raw, non-bullion coins, and I'll show you a 1972 Aluminum cent. Throughout this analysis, note that I only mentioned which categories of dealers consider themselves professionals, not which ones are actually professionals.  And the reason is - there is no official definition for what constitutes a "professional numismatist".  There are professional organizations that anyone can join for a certain fee, and get a piece of paper certifying them as a "professional numismatist", but there are no real tests or certifications.  This is much like skateboarding, where one is only considered a pro when their peers consider them a pro.  As a result, a lot of unqualified individuals end up calling themselves "professionals", and a lot of hobbyists who know more than some dealers call themselves "simple collectors".  The best advice is to do your research and target each dealer type's inventory differently. As a conclusion, I have been a professional numismatist before birth, as long as you, my peers, accept that. This is the Mad Coin Dealer.  Leave your ethics at hoe.

[madcoindealer]

Profit Analysis of the Certified Coin Industry: A second look

In a previous post, I noted that profit margins for certified coins are low compared to that of raw coins, for a variety of reasons. However, I now realize that some of my viewpoints were short-sighted, in that profit margins will be low only for the techniques used in short-term speculation (see my post 'How do coin dealers make money?' for the other ways). If utilizing direct-from-consumer purchases, the certified coin industry can be very lucrative - but the cash flow will still be less reliable than short-term speculation methods. Let's use an example: Mr. and Mrs. Suchandsuch's inherit a collection from their recently-passed father/father-in-law, consisting of many original examples in original dealer packaging, with receipts in the 1960s.  They look for a locally-based dealer who can purchase their collection for a flat-out fee, as they are short on some payments.  They don't know anything about the items, other than the price that was on the receipts, and any labeling on the containers.  They do minimal research. On arriving at a local dealer, they fall victim to the first mistake:  giving a backstory, and using that phrase "I don't know anything about them". Said and done, the dealer has about 50 certification candidates at just above melt value for any silver and gold coins.  After certification fees and eventual auction sale, the dealer is able to net a cool $15,000 in profit out of the deal. This story is replayed several times a day, all throughout the country.  Dealers see that there is much to be made in being a target for authentication and valuation of inherited collections by the general public.  Due to the usual 'sell-it-and-done' approach of the sellers, being the first stop for any person wishing to sell a higher-end collection is extremely desirable. Can the small-time or hobbyist-dealer make profit margins from the certified coin industry? I still say 'no'. Potential sellers of the type of high-value original collections (HVOC) will look for a business online with a good web presence, or a brick-and-mortar store that has been recommended by a friend, or is simply nearby. The only reason brick-and-mortar stores are able to stay open is because of the ignorance in those persons who are in charge of selling these type of high-grade, high-quality raw coin collections. Furthermore, 'Cash-4-Gold' type shops accentuate the issue of ignorance in the industry - high-grade certified example are then often sold second-hand, at steeply discounted prices to local brick-and-mortar dealers. The 'Good-ol-boy network' remains resilient to breaking in this industry- unknown, but otherwise reputable individuals will simply not be able to reliably acquire high-quality certification candidates for discounted prices, without penetrating this network. The number of high-quality original collections are decreasing - with the price of silver and gold, and the death of baby-boomers largely driving this.  This is one reason for the increasing death of brick-and-mortar shops in the industry - original collections are now being acquired by the large advertisers, like Cash-4-Gold, and the general interest of hobbyists has shifted online.  A challenge in the future will be advertising oneself as a buyer of high-quality collections, online - with higher prices than Cash-4-Gold type outlets.  The advertising cost can be potentially even higher than running a brick-and-mortar store - especially when trying to out-advertise the large, nationally backed outlets. For individual short-term investors, I can still not recommend certified coins.

This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

The one secret coin dealers don't want you to know

Sensational headlines?  What's the big deal?  This is important, that's why.  Over the past several weeks, I've given a lot of thought as to the various lies told to consumers about the coin business.  In thinking about the most often told lie, I considered lies that were told by all persons within the 'inside' industry.  Of course, half the things that come out the mouths of QVC salespersons are false - driven to lead sales.  But there's one lie that coin dealers tell consumers all the time, that the consumer doesn't even see as a lie. "You should never clean a coin." How many times have we heard this one?  Mr. and Mrs. Suchandsuch come in to a show, shop, or do an online consultation with some coin that they found, dug up, or inherited.  It has some sort of problem - it's covered with dirt, someone stored it incorrectly, leading to PVC residue, the toning is splotchy, the list goes one and on. There are three potential reasons why coin dealers tell this lie: 1.  Among more ethical dealers, and those dedicated to the art of collecting, it's a type of honest advice to the customer.  The customer shouldn't attempt to clean a coin, because the dealer acts as an expert.  There are innumerable online resources out there where consumers can learn to clean coins, and 95% of them are bad advice that if followed, would partially or completely destroy the numismatic value of the coin. 2.  They don't want to give out good advice, because people tend to malleate the advice.  This is a dangerous game.  The coin dealer tries to be helpful, and suggests something reasonable - like an acetone bath for a coin that has some tape residue.  Well, when Mr. and Mrs. Suchandsuch get home, they start dipping all their coins in nail polish remover (not pure acetone), then start looking around for other chemicals.  Before you know it, they've gone through their kitchen cupboards, inadvertently created a bomb, and their coins are ruined.  Of course, I do exaggerate.  (on a side note, at least one coin dealer has died of their chemical creation) 3.  They don't want to give out their secret, because they want the coin for themselves:  in my post 'How Do Coin Dealers Make Money', I missed a critical seventh source of income for some, but not all coin dealers:  they target certain problem coins for improvement.  This improvement may constitute any form of cleaning or doctoring.  

For those not familiar with the term 'doctoring', this is a widely interpreted definition usually meaning some deceptive cleaning or other surface modification to a coin, in a desire to promote and sell a coin for more than its fair market value.  However, some collectors and dealers extend the definition of doctoring to any form of cleaning, including market acceptable forms of cleaning.  I consider this to be incorrect - but I'm also in that category of dealers which receives a substantial profit from the improvement of problem coins.  Besides cleaning, there is a very niche, high end market for surface-type doctoring such as plugging - the application of additional metal or bonding agents to coins to conceal defects, and flat out repair of features.  However, these methods are only seen on rare coins attempting to become certified, because the financial incentive to perform surface doctoring on coins selling for less than $300 is not there.  That being said, there is still lots of potential for abuse, even for relatively inexpensive coins - but the alterations are done crudely by the hobbyist community, and are easily detectable. What is market acceptable cleaning? The major third party graders (TPGs) recognize that over time without care, coins will fall victim to entropy.  NGC, one of the major coin grading companies, even has its own subsidiary called "National Conservation Service" (NCS) - but it might as well be called an extortion racket.  I would estimate that 90% of NCS's work constitutes a single acetone bath, and nothing more.  By its sheer existence, the professional numismatic community has declared that the improvement of coins for profit is an acceptable practice. The first type of market acceptable cleaning is dipping.  Dipping coins has been discussed at MCD before, so I will not expound on those virtues again. In addition - any cleaning method which does not destroy or alter the patina of a coin, and will not leave a detectable residue is considered market acceptable.  What does this mean? Any* organic solvent.   Solvents are used for removing tape residue, PVC residue, markers, and lacquer.  This is the most controversial area.  A widely respected numismatic chemist, BadThad promotes the use of a polarity ladder that only covers the following solvents in order from first to last resort: 1.  Water 2.  Isopropyl Alcohol 3.  Acetone 4.  Xylene However, there is a whole host of solvents which will perform similar actions, and have no effect on the patina of the coin.  These would include in no particular order:  Methyl Ethyl Ketone, Naphtha, DMSO, 1,1,1-Trichloroethane, Tetrahydrofuran, DCM, Diethyl ether, Chloroform, Trichloroethylene, benzene, toulene, and white spirit.  One can locate chemicals that contain these items, but often these are sold with adulterants, which make these potentially troublesome for coins. For soil-encursted coins, soaking in olive oil is acceptable, as long as an acetone bath is applied after.  This can take months, and for most coin dealers, it's not worth the wait if inventory needs to move.  Junk bullion coins that are dirt encrusted may use ultrasonic cleaning or electrolysis. What's not market acceptable? 1.  Any abrasive or scrubbing action that causes hairline scratches.  This extends from toothbrushes, to help us all - steel wool.  Anybody who say this includes tissues or similar non-abrasive cloth is overly paranoid. 2.  Electrolysis and ultrasonic cleaning, which may cause pitting. 3.  Strong acids or bases which strip the patina:  hydrochloric acid (muriatic acid), sulphuric acid, highly concentrated hydrogen peroxide, sodium hydroxide (lye), limonene, lactic acid, acetic acid. Many amateurs use vinegar and salt to clean copper coins - that's a horrible idea. 4.  Application of lacquers, waxes, or oils, including body oils. 5.  Artificial toning, usually accomplished by the application of a sulphur-based oil, liquid, or simply placing the coin in the presence of suphur.   Annodization and heating are also used.  Some particularly shady individuals use these to make obvious fake "rainbow toned" coins. What about commercial coin cleaners? Any commercial coin cleaners are simply derivatives of solvents or a Thiourea-based dip. Konsolv = Acetone eZ-est = Thiourea MS-70 = Potash (uncirculated coins only; considered inferior to thiourea dip) What's the secret of a good, profitable coin dealer? The back of their shop is a chemistry lab. That's not a joke.  I would like to think this is done in a sterile, well-organized lab, with proper disposal of chemicals - but that's usually not the case.  However, it's likely that any good, high-profit dealer does engage in both market-acceptable and experimental forms of cleaning.  The incentives are high.  Submitting a coin through a TPG and receiving a favorable numeric grade can be a windfall, even for the hobbyist.  Buying and selling the 'correct' problem coins, improving them, and selling them on the right channels as raw coins is extremely effective, too Buyer beware.  We're two steps ahead of you. This is the Mad Coin Delaer.  Leave your ethics at home.

[madcoindealer]

Dipping Coins: The Racketeer's Guide: An Amendment

Recently, I published a guide on dipping coins, to improve appearance and sales price of certain varieties and conditions of coins.  One of the things which I made very clear in the guide is that you should not dip a coin that is less than uncirculated.  I am now ready to go back on that principle, after playing with some further specimens.  I did note that "to the untrained collector’s eye, a dipped AU58 will look better than an original MS-60 coin."  This is indeed correct, and I will still advocate for the dipping of AU-58 coins for online sales.  I think that when considering whether or not to dip coins, you should fully consider the target market.  I have found that eBay is a market where dipped coins do particularly well, probably due to the large number of hobbyists.  Dipping circulated coins to sell to the dealer market is still highly discouraged. This being said, there may be certain cases where you can dip coins that are not above an AU-58, and improve appearance, and sales potential.

The first category of coins are improperly cleaned coins.  I noted in my previous post that you can dip improperly cleaned coins, but it was implicit that they should be UNC details coins.  I am now in favor of dipping certain AU details coins, as well.  The subset of coins that this may apply to is very small, so don't go about dipping every AU details coins until you've evaluated items like polishing, and gouging.  These pre-existing conditions will exclude the possibility of a dip.  However, I have successfully dipped coins that were whizzed or lightly cleaned with a brush, and toned, to yield surprisingly good results.  In one case, I had an AU details coin that I dipped that was previously spot toned and whizzed sell for 150% of a BU specimen.  All other examples have sold over their problem-free AU premium as well.  For those who are originalists, I would argue that dipping or re-dipping a problem coin is not making it any worse than it was, aside from the ethical considerations of introducing a deceitful problem coin into the market.  Of course, this is the Mad Coin Dealer - leave your ethics at home.

The second category of coins is XF-AU coins with dark toning.  "Woah!  XF dipping?  You're nuts!" This should be used even more sporadically than the previous method.  In a particular example, I had a Standing Liberty Quarter with dark, consistent toning cover 75% of the coin on the obverse, and 100% of the coin on the reverse.  Using a heavily diluted solution, and using the spot dip method described in the previous post, I was able to turn a coin that looked previously VF-30 into a coin that will sell for an AU-50 premium, despite being a true XF-40 example, when closely examined. 20 grade points doesn't sound like a lot, until you realize the difference for some key "jumpers" may be $100 or more. This took quite some time to "properly" doctor, as to ensure the non-toned area would match the dipped area, in both color and consistency.  The coin does not look unnatural, and still retains a light golden tone, thanks to the dilution.  The important thing to note here is that the original coin did have remaining mint luster.  Under no circumstances should you dip a coin without mint luster, or lacking mint luster on <= 30% of the coin.  I'll be trying this on further appropriate examples as they come along, but as this was really the only coin that matched the criteria, this will not happen for some time.

This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

Amazon's collectible coin debut: an honest review

It came as ungracefully an unannounced as eBay's recent security breach - suddenly in my inbox this morning, Amazon noted to the world that their collectible coin online store was officially public, including the much anticipated Saddle Ridge Hoard.  That being said, I really have to ponder Amazon's business model and target demographics here.  A few issues:

1.  Like all Amazon products, these are fixed price listings, but the majority of transactions for online coin sales coins is in the form of auctions.  This is sure to have long inventory turnover periods, of which I recently discussed the lack of cash flow for coin dealers.  Of course, this fits with their current service model of fixed price listings, but it goes against the grain of the existing culture.  Amazon must have a different business model or target demographic in mind.

2.  One has to wonder Amazon's target demographic.  If true hobbyists and dealers routinely browse auctions, and ignore fixed price listings (as you should!) - who is Amazon catering to?  My best guess is non-active hobbyists - investors with cash looking to diversify into collectibles.  I would say this for two reasons:

   i)  Most of the current items on the site are high-grade, certified examples.  Typical price range for an item will be $80-$500, which is probably significantly higher than the average selling price for any coin on eBay, even in a Buy It Now environment.

  i)  Amazon specifically seems to exclude non-certified examples, but this may be observer bias.  At least in the classic US coinage that I observed, there were no uncertified examples.  I would say this is because Amazon wants to be seen as a vendor, and not necessarily a third-party.  By only allowing standardized products, Amazon is aiming to maximize customer satisfaction and deliver a consistent user experience.  As discussed previously, uncertified coins to the inexperienced collector are "buyer beware".  By limiting their inexperienced target demographic to only standardized (and therefore, higher-margin and more expensive) coins, Amazon is aiming for high customer satisfaction.

With all of this being said, I still believe that certified coins are a bad short-term and long-term investment, unless picked with extreme skill.  I do not plan on buying any coins on eBay in the near future.

3.  An eBay competitor?

eBay has long been the standard for direct-from-consumer online purchases.  I don't believe that Amazon is trying to infringe on this territory, but rather aim for a more affluent and investor-like demographic.  Based on their limited outreach, publicity, and limited product listings at the moment, for the non-investor, it is still more profitable to go to eBay for the same certified coins.

4.  Amazon's assuming too much about investor behavior

As I believe Amazon is targeting an investor or "upscale" (how much more upscale can you get in the hobby of kings?) market, it would seem their assumption is that they aim to make up for the net price difference based on brand loyalty.  Amazon already has crazy brand loyalty - to the extent that some persons in urban areas will simply order groceries from Amazon and pay a premium, based on their experience of a consistent product.  However, investors by nature are not brand loyal.  There are no significant barriers to entry when shopping at Amazon vs. eBay, and it is fairly straightforward to cross-reference an item.

5.  Exclusive events:  the key to domination?

eBay for some time has been featuring large partners such as ModernCoinMart and APMEX for bullion deals, as well as commemorative and high-grade certified coins.  All of these have been "buy it now" type events.  Amazon seems to be going this direction, by starting to offer the exclusive Saddle Ridge Hoard.  While I think the current prices of the hoard items is quite overpriced (even for hoard premiums), I think that Amazon could creep into eBay's grasp on the collector market by offering additional exclusive offers.

6.  The model fits - because Amazon doesn't care about cash flow

Unless a significant alternate investor community following develops, it is unlikely that Amazon will generate significant transaction volume from collectible coins.  Amazon, while being a deep discounter, is taking the approach of a traditional coin dealer, and encouraging high markup by its sellers by offering only fixed price listings, and charging high referral fees.

If Amazon truly wants to dominate and become a serious eBay competitor, they should create incentive towards listing in auction formats, and encouraging an easy migration products for the extremely large hobbyist and dealer community on eBay.  In addition, they should consider lowering fees to encourage volume selling - something that Amazon excels at.  Amazon has for many years, and many markets, taken large operating losses to gain competitive advantage, and it could work here, too.  Investors have noted the operating losses, but Amazon's stock price continues to soar, based on expected future earnings in both its digital and physical good markets.

This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

When the dealers already have a coin like yours

In a previous post, I covered a couple of reasons why coin dealers (incorrectly) undervalue collections, even at their already low wholesale bid prices.  In certain cases, there are times when a person would like to sell to a coin dealer something that the coin dealer already has.  This could range from the extremely common and low-value (proof sets), to mid range pieces such as raw, uncirculated Morgan Dollars, to higher grade certified coins.  Lots of dealers make the mistake of not purchasing the duplicate items - they simply will not buy it at any price.

This is an obvious market inefficiency, because the irrationality of the buyer.  It may not always be irrational to refuse a duplicate product at any price, but if it's actually a rational move, this dealer has serious cash flow problems.

One of the differences between the numismatic markets and the equities market is the liquidity of the products.  Part of this lack of liquidity is self-imposed.  Many dealers use a retail, rather than auction format to their listings, and very often, these prices are out of line with even the retail prices that serious collectors will pay.  Therefore, each dealer tends to accumulate a large amount of static inventory.  When items do sell, they sell for a hefty profit, because of the amount over retail (and purchase / wholesale), but they suffer tremendously due to inflation and the lack of cash flow.

This leads to the market inefficiency I have described - the dealer simply will not buy your coin at any price, because:

1.  They will attempt to sell it retail, and based off the performance history of their equivalent piece, it will require a very long inventory holding time.  This hurts cash flow further.

2.  They will attempt to sell it retail, but this will require having two of the same coins in their inventory, which in their view, makes the potential customer see that item as less valuable.

The second reason is a special kind of fallacy - it is only effective if the target piece would be purchased by an amateur collector.  Only amateur collectors would gauge the rarity of a particular coin based on a single dealer's inventory.  Serious collectors know that there are better ways of gauging total extant specimens, and therefore, absolute rarity of a particular coin.

The first reason is in my opinion, the myopia of the dealer.  Passing on an otherwise good coin is a bad choice - especially if this is a direct-from-consumer purchase, where profit margins could be high.  The consumer may accept less than even the discounted wholesale bid for the coin.  That being said, I would like to propose a new hybrid model for the sale of duplicate coins - one that I myself have been using with success.

When presented with a duplicate coin for potential purchase, always treat this as if your current inventory did not exist.  Solely look at the market factors, wholesale and retail pricing.  To maximize cash flow, use an auction-only model.  Coins can be quickly turned over, and not subject to long-term special collectibles tax on capital gains.  To maximize profit, use a hybrid model - sell at retail one of the duplicates, and sell the other at auction, to free up cash flow.  If the duplicate selling on the retail market has not been sold at close to 1 year, sell it before long-term capital gains takes effect.

Remember, because of the tax structure for collectibles, persons making less than $90k will pay less in taxes when selling collectibles in less than one year.  This seems odd, because it theoretically gives poor people more incentive to sell their heirlooms at a loss.  However, if you make more than $90k a year, you could potentially benefit tax-wise from holding items over 1 year.

This being said, I operate in a very lean inventory model.  I take in duplicates without hesitation, and attempt to clear duplicate inventory within 90 days, and other inventory within 180 days.  On a theoretical basis, no inventory that exists in January should still be present in July.  This allows for a much better cash flow than other dealers of similar inventory sizes.  Of course, on a piece-to-piece basis, I probably do not beat the traditional retailer dealer on profit margin, but in terms of total profit over all coins sold, I do.

In two future blog posts, I will cover the related topics of buying many, many duplicates - answering the question "Can you corner the market for a coin?", and the topic of localized oligopoly within the industry.

This is the Mad Coin Dealer.  Leave your ethics at home.

[madcoindealer]

10 Crack Commandments: Sound Business Advice

Biggie's infamous 10 Crack Commandments actually has a lot of sound business advice.  Coin dealing can certainly learn from the rules that Biggie lays out.  I present, an inline transcription of 10 Crack Commandments.

Rule Nombre (sic) Uno: never let no one know How much dough you hold cause you know The cheddar breed jealousy 'specially If that man fucked up, get yo' ass stuck up

Don't brag about the value of your current possessions.  It makes you a target for burglary, robbery, or mugging.  When dealing with potential wholesale buyers, never reveal your current supply levels if they ask about it.  You can always increase purchases to meet their needs, later.  Besides, we want to use a Just-In-Time supply chain methodology, to limit inventory risk.

Number 2: never let 'em know your next move Don't you know Bad Boys move in silence and violence? Take it from your highness I done squeezed mad clips at these cats for they bricks and chips

When dealing in potential sales or purchases, never reveal any information like your wholesale costs (what you paid for an item), overhead ratios (and things that can be used to reverse engineer them), and maximum prices you are willing to pay.  Don't negotiate downward, unless absolutely necessary - and keep them guessing.  Never reveal any patterns in negotiation.

Number 3: never trust nobody Your moms'll set that ass up, properly gassed up Hoodied and masked up, shit, for that fast buck She be laying in the bushes to light that ass up

Plain and simple - don't trust anybody's intentions.  This is capitalism, and lying, cheating, and stealing can only be enforced to the extent that the law allows.  People will make up any story about the origin of their coins, their knowledge of coins, method of acquisition, or doctoring of the coin.  Anybody that is properly motivated (and they will be; this is a capitalist society), even your mom, will lie to you to gain a fast buck.

Number 4: I know you heard this before "Never get high on your own supply"

Dealers who are also collectors tend to have lower profit margins.  Don't ever keep a coin for your own "personal collection".  It's a pretty piece of metal, but you can buy prettier pieces if you're good at selling them.

Number 5: never sell no crack where you rest at I don't care if they want a ounce, tell 'em "bounce!"

If you sell out of your home as an online business, it's better to have a PO Box as a return address.  Don't meet unverified buyers at your home.  They could be well disguised burglars who are scoping out the place, right in front of you.

Number 6: that goddamn credit? Dead it You think a crackhead paying you back, shit forget it!

Dealers and collectors can accept credit cards, but that's not the concept of credit that Biggie's talking about, here.  This type of credit is equivalent to an unsecured personal loan, or commonly known as "fronting".  If somebody wants an advance on your inventory, I would seriously question why they need the loan.

1.  They're actually going to disappear after taking the item.

2.  They're going to sell it to a third-party buyer, and make a quick turnaround on a loan with no interest.  You should find out how to connect with this party, yourself.

3.  They're short on funds, and there's no guarantee that the sale of the accessory items is accurate in terms of liquidity or valuation

7: this rule is so underrated Keep your family and business completely separated Money and blood don't mix like 2 dicks and no bitch Find yourself in serious shit

This rule is less relevant than the others.  Many local coin shop are family operated, and seem to run without jealousy or family theft.  This should be to the individual's discretion.

Number 8: never keep no weight on you! Them cats that squeeze your guns can hold jums too

Biggie prefers his organization's associate employees to hold the majority of the liability in the case of a mistake.  As in all businesses, the higher up in the chain of command, the less dirty work you have to do.  To limit liability, it's best to hire independent contractors, if possible.

Number 9 shoulda been Number 1 to me: If you ain't gettin' bagged stay the fuck from police If niggas think you snitchin' they ain't trying to listen They be sittin' in your kitchen, waiting to start hittin'

If you're on the shadier side of the law, best to take advice and stop snitching.  Otherwise, ignore this.

Number 10: a strong word called "consignment" Strictly for live men, not for freshmen If you ain't got the clientele, say "hell no!" Cause they gon' want they money rain sleet hail snow

This is very self-explanatory.  Don't buy on the premise of reselling, when you don't know if you will be able to connect with a potential buyer.  Most coins have a fairly high liquidity, but some higher-ticket items need the right seller to be successfully consigned or flipped.  You wouldn't sell an MS-68 Morgan Dollar as a no-reserve auction on eBay:  the higher net worth collectors and high-end dealers don't frequent there.

This is the Mad Coin Dealer.  Leave your ethics at home.