Fine art no hedge against inflation

(breakingviews.com) -- The past week's impressionist and modern art auctions at Sotheby's and Christie's didn't go well. But they were far from dreadful. The same is expected at this week's contemporary auctions.

While the financial crisis has taken a thwack to the hedge fund heavies and Russian industrialists that bid up art during the boom, industry executives say well-heeled collectors are buying art now to prep their vaults for a coming bout of inflation. However, those who view art as a great hedge may be disappointed.

The art market's mood has been decidedly pessimistic. There's good reason for that. Global economic weakness has drastically shrunk the buyer pool. And the best pieces aren't finding their way to the block because many sellers are afraid to sell at what they consider fire-sale prices. Furthermore, several Bernie Madoff victims appear to be forced sellers at distressed prices.

So it's no surprise the results of last week's auctions were lackluster. Sotheby's took in $61 million, down from $223 million last November. And Christie's sold $102 million of work, compared to $277 million the year before. The coming contemporary auctions are expected to be more of the same. But the fact that they weren't a total dud was surprising.

Industry observers credit a familiar figure from the past - affluent collectors scared of inflation. History does show that art prices rise during inflationary periods. The Art 100 Index, compiled by Art Market Research, shot up 130% from 1977 to 1982, a period which saw an 80% increase in U.S. inflation. With record amounts of fiscal stimulus being pumped into the system now, most economists expect inflation to stage a comeback.

But art's fleeting fashion makes it a difficult hedge. Artists that may seem a safe investment now could prove out of favor in a decade. Vincent Van Gogh was the art world's price leader in 1989. Now, on a list ranking artists by auction turnover last year, compiled by Artprice, Van Gogh ranks 394.

Unpredictability isn't art's only problem as a hedge. Buying a Picasso isn't like buying gold bouillon. It is highly illiquid because items are often one of a kind, with a limited pool of potential buyers. And its transaction costs are exorbitant. Sotheby's charges fees as high as 25%.

True, a Picasso on the cheap may not carry much risk. But in the end, the better decision is to relegate artwork to walls, not vaults.