There’s been a lot of talk about the art market this last week. The Financial Times went as far as declaring the art boom over based on the Impressionist and Modern sales. Clearly the ever-rising market has come to a halt. But does that mean art will now go straight down? And how would we know?
Art is different from other assets. But Gold seems to react to some of the same forces. The Wall Street Journal ran this “Heard on the Street” item today that offers a little insight into the financial climate that surrounds art:
Right now, with consumer-price inflation running at 4.9% and Treasury bills yielding less than 1%, real interest rates are negative. This should be supportive of gold. That it isn’t suggests real rates are set to head back toward positive territory. Since major central banks won’t jack up nominal interest rates, it is prices that will give way, as consumption contracts world-wide. Friday’s shocking unemployment data fit that scenario. Gold’s fall also suggests that, despite a raft of reflationary initiatives, the banking sector’s problems mean the transmission mechanism to the rest of the economy remains broken.
As Lorenzo Di Mattia, manager of macro hedge fund Sibilla Global Fund puts it: “Gold is again a barometer of how well the ‘reflation attempt’ by the Fed and government is working and when it seems to be working, both gold and stocks should be up. … If it doesn’t work, you will see gold and stocks down together.”
To translate that, we’re in a deflationary moment when money is more valuable than things. Gold is a thing that has mystical powers for many people in the world–much in the way that art holds a mystical spell on its owners. If Gold rises in dollar value, there’s a good chance that art will do so as well. Both will be responding to the amount of money that is circulation in the world’s economy. Central banks are making lots of money available to banks; banks have not lent that money into the economy. So money is scarce causing both gold and art–and dozens of other asset classes–to deflate in price.
When–or if–that money gets circulated, asset prices may “reflate.” Right now, the price of gold tells us that reflation remains somewhere over the horizon and art prices will remain under pressure to come down.
Gold’s Deflating Decline Augurs More Ills (Bloomberg)
