Liquid Paint: A brief discussion of art and investment.

On May 11th the record for most expensive painting sold at auction may be swept away yet again. Picasso’s Les Femmes d’Algers (Version “O”) will come under the hammer and is expected to be sold for over $140 million. However, if you follow the art market, events such as this seem to happen with alarming regularity. Edvard Munch’s canonical Scream held the record for paintings starting in 2012 only to be broken the very next year by Francis Bacon’s Triptych. Auction houses like Christie’s have been posting record sales on a surprisingly regular basis. What might be one of the causes for the impressive expansion of the art market, and what does that mean for the future of the arts?

A great deal of articles one might read about the art market are focused on the skyrocketing values of works, and the new and clever ways that investors are using art as a way to expand and diversify their portfolios. Many publications such as The Wall Street Journal and Bloomberg have been discussing the merits and dangers of investing in art.

New infrastructure and processes have arisen to reinforce the investment mentality for art. “Freeports” or tax sheltered storage, often attached to airports, have grown in popularity and house untold numbers of priceless objects. The warehouses were originally meant for the temporary storage of goods during shipment, but have evolved into highly sophisticated private storage units. Items housed in these facilities are exempt from import taxes as long as they remain there, and any sales made within the facility are also free from transaction taxes until they are removed. Showrooms and apps to track works and their values are becoming part of the storage package and seek to increase the liquidity of art and luxury items. This expanding practice promotes the sale, trade, and subsequent storage of luxury items within the tax free zones.

In this morning’s paper, the New York Times explored “like-kind” or 1030 exchanges which are used to defer taxes when trading items of art. Because of the stipulation that like-kind exchanges must be only for investments for business purposes, the works cannot be displayed for personal enjoyment after the trade. This further bolsters practices similar to those promoted by freeports.

Although they make up a small portion of the investment landscape, Art funds are another growing and notable practice in the art world. In their most simplistic form, Art funds allow investors to buy into a collection of art that they may otherwise be unable to afford. At the end of a predetermined term, the art is sold and the returns are split up between the investors.

The point I am attempting to highlight is that art is becoming increasingly accepted as a financial instrument. Furthermore, the majority of the art market’s inclusion in the media highlights this change. This acceptance has expanded the demand for art past the prototypical collectors and museums and into the realm of investors and fund managers.

My foremost concern with the increased practice of using art as an investment is that it will detract from the social value of the arts. It seems that where art prices were once defined by works of art, the works are now defined prices. One can see that the new practices and infrastructures in the art world are directly opposed to the general enjoyment of the art for its artistic value. Art is increasingly being horded by investors and fund managers in vaults that discourage their removal. The soaring prices for high end art may also become prohibitive for the lower range of museums and collectors, detracting from the gross social value of art.

Well, one might ask, won’t this all be solved when the market corrects itself from what seems to so obviously be a bubble? A problem with this theory is that the bursting of the bubble relies on investors and collectors realizing that prices being paid are higher than the intrinsic value of the item. The increased use of art as a financial instrument has raised the intrinsic value of art by expanding its usefulness from an aesthetic item and status symbol to legitimate investment opportunity.

The moral of this story, I guess, is that the art market has some issues. Or, perhaps, in the way art was once used to glorify the revered ideologies of religion we are seeing it morph to play the same role for capitalism and our financial sector. But that’s a discussion for another time.

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