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Understanding the mechanics of art prices

Investment scenario is getting further complex with metal and precious commodities like gold and silver witnessing a free fall. With the big equities sell off and some rebound in them, for now at least, after Ben Bernanke hinted that the US Fed might soon begin unwinding its quantitative easing program, investors are even more confused. Where does that leave art market?

With the different sets of buyers with differing motives and mindsets in the complex mix of today’s dynamic art market, calling its direction and guessing its trajectory is not easy. The stock market dive in particular has resulted in inevitable speculations about the fact whether the global art market would remain insulated from these developments!

“Well, there are not any easy answers to this query,” points out, Kathryn Tully, a contributor to The Forbes, “Supporters of art as an investment argue that art is not correlated to traditional asset classes. They say that many people view art and other so-called real assets as a place to protect their money and hedge against inflation when things get hairy elsewhere in the markets. But the argument that art is not correlated to other assets is not always true.

“Art market movements, at least some of the time, can be closely aligned to stock market gyrations. When the latter sold off at the end of 2008, the art market did take a hit. The global sell off of mid-2011 when the euro zone debt crisis was at its peak and the US lost its triple-A credit rating caused jitters across the art market, as well.”

The truth of ‘the tricky matter’ is: The art market can get rattled. “It’s very much based on confidence hence can get spooked. Artvest co-founder, Michael Plummer, stated at the recent Art Investment Council discussion mentioned that the scenario can play out very fast. Explaining his point, the expert pointed out, “In the fall of 1990, I was at a contemporary art auction at Sotheby’s. In that one night, the market crashed. Suddenly, half the lots didn’t sell and very important paintings were bought in. The same happened again in the fall of 2008.”

However, the current indicators seem pretty solid as underlined by the ambitious Impressionist, Modern & Contemporary sales that took place last in June in London. They produced decent results (if not amazing). What about the broader art market in context of quantitative easing program or its withdrawal, though? Trying to draw a picture of her own, Tully mentions: “If art is supposed to be defensive purchase as well a safe haven and the Fed is signaling that the economy is finally doing better, shouldn’t people be selling their Warhols and opting for growth stocks? After all, the gold and silver prices have also plummeted recently and everyone loves to lump Silver, Wine, Art & Gold (SWAG assets) in the same bucket.”

So how will be the longer-term trend like? Will the stock market crash and continue to do well, while the art market strengthens as an anti-dote or vice versa? The market watcher feels that even while some buyers consider art more as ‘a safe haven’, there are many others who purchase it since they are of confident of racking up massive returns.

And the more the latter motivation comes to surface in the contemporary art market, the more it will get correlated to equities. On the contrary, even more will continue buying art simply because they genuinely love it. And until they do not any longer have the means at their disposal to take it home, come what may, they will continue buying.