Art & Money: Gold vs. Art Assets

Gold has always been a traditional store of wealth, specifically during times of economic uncertainty. Prices are often unaffected by global political situations, there is as a consistent demand and supply, and it is safe enough as an investment that even major banks utilize gold as an official reserve asset. However, seasoned investors are slowly but surely turning towards investment grade art for diversification and storage of wealth.

With central banks cutting rates and quantitative easing, investors were purchasing gold stocks with positive bond yield while making negative returns (government bonds in Japan and Europe went negative in the last two years). Currently, the estimated size of negative bonds is said to be around $10–12 trillion. Without an end in sight for negative rates and quantitative easing, investors continue to look for alternative investments which will give them the same amount of security and diversification.

As a fixed asset, gold has an edge over equities and paper currencies, especially since banks worldwide have been increasing the output of money, which would cause chaos when currencies suddenly lose their value. As a result, gold is now considered an alternative currency as it is widely held by investors across the world while being a highly liquid asset. History has proven time and time again that gold has been used as a method of exchange during times of economic turmoil.

Despite its edge, gold is currently at a five year trend low. Since its peak in September 2011, SPDR Gold Trust (GLD:US) has declined by over 30%. Economists believe that this was caused by the overvaluation of gold, as well as the strong dollar and increasing interest rates from the bullish American economy. Hence, diminishing the appeal of gold to international investors. Seasoned investors are now realizing the necessity in finding an alternative source of investment as a store of wealth — turning to art assets. While many critics argue that the art market is not as transparent as gold — savvy investors are one step ahead. Nowadays, art prices are widely and readily available with technology. In fact, the art market has a much higher level of transparency than gold and equities combined. While gold prices are fixed daily by a committee who has the ultimate ability to set prices, the value of works of art is unique to each piece. Factors include: Artist, medium, date of creation, origin of location and size of work.

According to Deloitte Luxembourg & ArtTactic’s Art and Finance Report 2014, 76% of collectors are buying art for passion with an investment perspective (up from 53% in 2012). This implies that the investment aspects of art (its financial or economic value) is something that collectors are increasingly focusing on. The 2016 report notes that 78% of wealth managers (up from 55% in 2014) said that they thought art and collectibles should be included as part of a wealth management offering. Furthermore, the art market’s resilience to the economic environment is clear — after the 2008/2009 economic depression, the art market returned to pre-recession levels within sixteen months.

With more economic and political uncertainties in sight, it’s not too late to turn to art investment as a store of wealth while diversifying your portfolio. With Arthena, the art market is no longer speculative. By using proprietary analytics and machine learning, we determine annualized returns and Sharpe ratios to validate the financial viability of our product and establish statistically rigorous bounds.