Sarah Thornton writes about the “gravity-defying surge” of people buying art as investments:
The bulk of revenues comes from “ultra high net worth” individuals, many of whom operate at a level far above national economies. Even those who have taken blows in recent years remain super-rich. If they were worth £3bn in 2007, maybe they’re worth £2bn now. It’s not like they’re feeling the pinch.
The burden for the stinking rich is what to do with their money. There is currently no interest to be earned on cash, so they can’t leave it in the bank. The property market is nearly paralysed and, for these globetrotters, the drawback of real estate is that it is tied to specific currencies. A Mayfair flat sells in pounds, but the Francis Bacon painting that hangs on its wall could sell in Hong Kong dollars and take up residence on a yacht in the South Pacific. Like historic or extra-large diamonds, works by artists with international recognition are a hedge against volatile currency fluctuations.
Fifteen years ago financial advisers were not in the practice of recommending that rich people diversify their portfolios by buying art. Now it is the norm. While buying emergent art is high-risk, speculative investment, acquiring established masterpieces is perceived as the opposite – a back-up in hard times. If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.
The auction houses are fostering a globalisation of taste with the help of galleries with international outposts such as Gagosian, Hauser & Wirth and now White Cube. While wealthy Belgians used to spend their money differently from wealthy Indonesians, this is decreasingly the case.
Felix Salmon counters:
This would be a lot more convincing if Thornton actually named or quoted any of the financial advisers who are reportedly “recommending” buying art as an investment. Because I’d love to talk to one. Art’s a dreadful investment: it’s got a negative carry, it’s highly unpredictable in terms of value, there’s no reason whatsoever why prices should go up rather than down, and, of course, you can put your elbow through it at any time.
In my experience, the only people who ever recommend that rich people diversify their portfolios by buying art are people who are going to make money, somehow, from the deal: people selling art investment or advisory services. Everybody else is generally pretty sensible, and sticks to saying the simple truth: Buy art because you love it, not because you think it’s going to rise in value.
More generally, the stinking rich are, as a rule, swamped with bright ideas from people guiding them on what to do with their money. They all have family offices, replete with highly-paid investment managers: The alternative here is not to simply leave the money in the bank, earning no interest. (More likely, they own the bank, take other people’s deposits, and lend them out at a healthy profit.)
And the idea of art as “a hedge against volatile currency fluctuations” is just bonkers; I’m not at all surprised that the line appears in a column for the Guardian, rather than in Thornton’s normal home of the Economist. If you have billions of dollars and you want to hedge against currency fluctuations, then — and I hope you’re sitting down for this — you hedge against currency fluctuations. Options and swaps and futures and forwards and the like are as commoditized as they come in the foreign-exchange markets, and much easier and cheaper to buy and sell than any major artwork.
Thornton’s wrong, too, about the intrinsic value of a 1964 Marilyn by Andy Warhol. If it was worth 10% of its current value a few years ago, it can be worth 10% of its current value in a few years’ time, too. Admittedly, 10% of its current value is still “something”. But that hardly makes the Warhol a remotely sensible investment. The whole point of art is that it has no intrinsic value: that its financial value is a magical number which is some highly variable function of how much various incredibly rich people love and covet the work.
I agree with Felix Salmon. Artwork is not a viable investment: it’s illiquid and highly speculative and subject to modern tastes and preferences. Buy artwork because you enjoy looking at it on your wall. Don’t buy it thinking that you can sell it later for a profit.