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Tuesday, September 8, 2009

General Commentary- Grading the Grading Fetish

Is this stamp (Scott Value = 25c)

worth $ 200?

In the last few years, the U.S. stamp market has experienced the introduction of a new variable, affecting (and possibly, distorting) the value of stamps in premium condition - graded certificates. Expert grading has been a feature of the coin world for decades, and seemingly minor condition differences between coins of the same type can vastly affect their relative values.

The practical question is: how should the wise philatelic investor factor in the condition of a premium-graded stamp when estimating its present and future market values?

Certainly, well before graded certificates came into play, stamps in premium condition (especially U.S. stamps of the 19th and early 20th century) frequently sold for many times their catalog values. It is reasonable to assume that such stamps will continue to do so in the years to come, for many pre-1920 U.S. issues are often poorly centered, and those which exist with XF or better centering, or with abnormally wide margins, do indeed constitute "condition rarities." Obviously, it's impossible to know what quantity of a particular stamp exists in premium condition, although when a graded stamp is sold at auction, a "census" of the number of examples which have certified with that grade is often cited. There have been many publicized instances of highly graded stamps with catalog values of $500 or less selling for tens of thousands of dollars, so apparently, some calculation is being made regarding rarity. Currently, the U.S. expert services which grade stamps grade only stamps of the U.S. and U.S. Possessions; a key question to consider is whether grading will eventually extend to foreign stamps as well.

The "grading fetish" has also resulted in examples of modern, typically well-centered U.S. stamps which have been certified with grades of 98 (Superb) or higher selling for 100 to 1,000 times their catalog values (or more). Many such stamps would have sold for only their face value before the certification of stamp grading was initiated. Does it seem reasonable that a Gem-100 graded stamp from the 1930s or later, with a catalog value of 20 or 30 cents, should sell for $200 or more? Probably not. Will such a stamp continue to sell for such a high multiple of catalog value after the census of the stamp in Gem-100 condition increases, thereby making it seem less "rare?" Almost certainly not.

A similar question relates to earlier graded U.S. issues as well: if a premium-graded stamp with a catalog value of $500 sells for $ 50,000 at auction now, does that mean that if, over the years, the basic stamp's catalog value rises to $1,500, the same high-grade stamp will sell for $150,000? Will there be sufficient number of rich, grade-sensitive collectors at that level of the philatelic stratosphere to bid it up?

The craze has also sparked the somewhat dishonest practice of selling high-graded common imperforate stamps for exorbitant prices. As is known by most experienced collectors, the U.S. issued many inexpensive imperforate stamps in the 1920s and '30s, and many of these are still available in multiples or full sheets. It is a relatively simple matter to cut a wide-margined single out of a sheet and then send it off for a graded certificate. The tactic takes advantage of a bug in the system: although using centering (and to some extent, margins) a criteria for grading should apply only to perforated stamps, the firms which grade stamps haven't recognized that fact. To then offer a graded imperforate stamp for sale as a Gem-100 example, at an absurdly inflated price, is nothing more than a way to prey on unsuspecting collectors.

There is no question that an XF, Superb, or large-margined stamp (other than a cheap imperf, as noted above) should sell for considerably more than one in lesser condition. Because no one really knows how much value premium condition adds, the additional amount that is paid for such stamps over the cost of a normal VF example- the "premium condition premium"- will be determined purely by competition among a few well-heeled bidders, and consequently, will remain unpredictable. Should the current fad become less popular, or an economic downturn diminish the pool of high bidders, the premium paid for such stamps will also diminish, probably dramatically.

Most of the profits from the grading game will be made by those who issue the graded certificates, those who get top-grade certificates on stamps and sell them fast, and the auctioneers who reap the commissions. Over time, the high buyers will be out of luck.

Beware of the grading craze. It's the stamp market's current version of the Emperor's New Clothes.

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