By Brendan Metcalfe…… The story of art as an inflation hedge is a fairly simple one; there will always be rich people and rich people always want art. Fair enough. So how does one invest in art? It seems to me that there are two types of investment art. The first is investing in ‘emerging’ artists speculating that the artist will receive greater demand in the future. The second is investing in ‘brand name’ artists like Picasso or Van Gogh expecting that demand for high-caliber art will receive equal or greater demand in future. Emerging artists are more high risk, high return where brand names mostly just maintain their value. I have found that, although art certainly can be an investment, it is not an inflation hedge in the short or long term regardless of artist classification.
Emerging artists no inflation hedge
- Short Term: Artists may not have their popularity streak line up with an investor’s preferred liquidity date. Countless artists only received notoriety in old age despite creating and selling art for decades. Investing in new artists is not feasible for short term investing because the investment thesis for a new artists is they will ‘make it’ and therefor their work to be valuable. Investors have no choice but to wait until the artist makes it. It will also be harder to make it in a highly inflationary or recessionary environment, making it a terrible inflation hedge. The only way to get real short term gains is through arbitrage. This type of investment is almost purely speculation, especially for the common investor, and definitely not a viable short term investment or hedge.
- Long Term: Emerging artists that get famous usually don’t stay famous. Artists who become popular are often ‘fads’ and slowly die in popularity and there is nothing you can do about it. Investing in an emerging artist as a long term hedge is like investing in Beanie Babies for similar reasons. It can go up for a while if you get the trend right, but is not a long term inflation hedge by any means. In essence you are betting that an artist that isn’t even famous yet will STILL be famous when your grandkids inherit the painting. Terrible investment. Emerging artists are clearly not good long term investments or inflation hedges.
Why ‘brand name’ art is not an inflation hedge
- Short Term: There is so much rare art that each sector will require a new art expert. The only way to invest in rare art is to hire experts, authenticators, and commission fees upon purchasing and/or selling. You also have to pay to store it and insure it. Art brokerages definitely have higher fees than stock brokerages or bullion dealers. Any short term buying and selling of rare art will almost certainly lead to losses.
- Long Term: Even after we assume the artistic tastes of the super-rich will never ever change, I still have concerns. My main concern about owning a piece of rare art, or any ‘rare’ asset, is the reason it is worth money is because it is rare. Anything that brings down the rarity, or scarcity, of a piece of art brings the value down permanently. For example, let’s say there are three guys who each own a different Van Gogh painting. One of his only ever Paris skyline, one of a famous woman, and one of bicycles. What happens when they open an attic and find a Van Gogh painting (or ten) of a famous woman riding a bicycle in front of the Paris skyline? You have three rich, sophisticated art investors who just lost millions because of a garage sale. Buying rare art is a bet that nothing similar will ever be found. Keep in mind, the original goal we are trying to accomplish is to take cash and not lose purchasing power over an indefinite period of time. Bottomline; it is much easier to double the supply of 1887 Van Gogh’s than to double the supply of gold. Rare art certainly is not an inflation hedge in the long term.
Art is not an inflation hedge on the short or long term. Short term buying and selling is plagued by high fees and illiquidity. In the long term artistic taste changes and so does the rarity of the art itself. Essentially, the supply and demand mechanics of the art world doesn’t contain characteristics consistent among other inflation hedges. As a history buff this was painful to write. But the truth is rare art is not inflation-proof. Rare art is not a hard asset; it is actually quite fragile.