PRETTY EXPENSIVE

The new reserve currency for the world’s rich is not actually currency

Here’s an interesting question: If the world’s economy is filling markets with a pervasive sense of uncertainty, why is the art market picking up steam for yet another season of what would appear to be massive sales?

For the very rich, art is a store of value—which is not a very new idea and one reason that art is often lumped in together with gold as a safe haven from inflation. Gold prices peaked in 2011 and have been on a long slide ever since. Not art. That’s because art is also an object that provides social currency knitting together a select group of global nabobs and those who want to be seen sharing economic and cultural rank with them.

Owning art—and, if you can, owning a lot of art—provides a kind of access in today’s globally integrated social world that few other objects can provide. The few thousand serious, active art buyers around the world come into contact through transactions, on museum boards and during the endless round of global art fairs and biennials. There is no vetting committee for collectors. Money, patience and determination will get you taken seriously enough. You just have to buy art. And the auction houses, art advisers and global galleries seem more than willing to oblige.

  Across the board, the art market is showing exceptional confidence these days.  Even though markets around the world began to collapse in mid-August, Christie’s announced in early September that it would hold another gigaweek round of Contemporary and Modern sales in New York in November. Anchoring this show of force, the auction house announced a $100 million Modigliani nude that the owner agreed to consign only if Christie’s would assemble a show-stopping sale of equally sought-after mega-works.

The move might have been seen as a headstrong action from an aggressive, risk-taking firm were it not followed shortly thereafter by Sotheby’s own decision to guarantee former Chairman Alfred Taubman’s art collection for an unprecedented $500 million. The size of that guarantee, by the way, is evidence of more bullishness. Even with Taubman’s son on Sotheby’s board, the estate was not willing to award the sale out of sentimentality. Sotheby’s paid up because others would have had it not, which gives you a barometer of the art market’s internal forecasting.

Meanwhile, private galleries continue to open more branches, take on more artists and estates, and, like Gagosian, bring on the world’s most respected curators to produce museum-quality shows. Across the board, the art market is showing exceptional confidence these days.

But why?

The conventional answer is that art indicates a bubble. It’s a frivolous purchase made by the reckless rich. After all, these gung-ho aesthetes are presumably the same insulated fools who gobbled up nearly $200 million worth of Damien Hirst’s art the day Lehman Brothers failed.

Received wisdom also tells us that the art market is a backward-looking indicator with buyers spending excess cash they’ve already decided they don’t need. In this view, auction market collapses tend to trail the financial markets by six to 18 months.

 Art is now viewed by the very rich as an alternative currency. Tell that to those who consigned works of art in November of 2008 when the market froze nearly as completely as a mill pond in a Breugel painting. Like everything else in our current financial world, perceptions in the art market today are swift and reactions immediate.

And yet. The professionals who run auction houses keep close contact with their clientele. If the auction houses are offering big guarantees, it is because they have confidence that the world’s wealthiest remain eager to buy art, especially the most expensive art.

There are some very good reasons to believe that there have been important changes in the art market that reflect some broader changes in the global economy. I’d like to suggest that one of the reasons art has become more and more valuable over the last decade and a half—but has accelerated even more rapidly in the years since the credit crisis—is that art is now viewed by the very rich as an alternative currency.

Art as currency

For art to function as currency though, collectors have to buy the art that others esteem, which is one reason the world has seen the Qatari royal family spend so freely on some of the most recognizable and well-thought-of paintings remaining in private hands like one of Cezanne’s The Card Players and a Gauguin that is thought to be the world’s most expensive art transaction at $300 million. Today the Qataris are taken seriously not because they have a lot of money but because they have—or we think they have—a lot of important art.

 Collectors used to buy and hold, now they buy and trade. Art can be used as a currency today only because the art market has grown to the point where the value and volume of transactions allows it to function that way. What’s new here is the scale upon which art collecting is taking place. Passionate collectors once owned a few dozen works, now the big names own thousands. Collectors used to buy and hold, now they buy and trade.

The crowning achievement of a life of collecting was once a museum donation that might be housed in its own pavilion, now we have hundreds of private museums. Eli Broad’s museum in LA was merely one, and perhaps the best, of those that have recently opened or been announced. Who knows how many more billionaires or mere multi-millionaires will visit the Broad and think, could I do this one day? (The answer, of course, is a resounding, ‘Yes!’)

Opening a private museum isn’t something one does—even one with seemingly infinite resources—on a whim. The Broads have been collecting for nearly half a century. And, as everyone in the art market knows, mere money won’t buy you the best art. Although the most expensive works are rarely the best works, the best works do become more and more valuable over time. That process can move what is commonly referred to as blue-chip art from having social currency to becoming something even more rarified, a reserve currency.

Art as a reserve currency

In monetary terms, a reserve currency is money that gives you easier access to the dominant economy. Throughout history, the hegemonic power has seen its currency become the favored medium of exchange. Those who are not residents of the dominant power also acquire and hold its currency to be sure they can gain access to goods and services they might not be able to obtain with their own weaker currencies. For much of the 20th century, the US dollar has filled the role of the world’s reserve currency. Before that, it was the British pound and at times the Euro and the Yen have both functioned in the same way. Citizens of nations all over the world hold dollars because the value the dollar is considered stable and safe.

 Art became a luxury purchase. Then it became an investment.  In this sense, owning art over the last decade and a half has gone from being a particular interest among some of the world’s affluent to become a symbol of membership in a global class of the world’s elite. In the past, only a small percentage of the rich were willing to devote the time and resources necessary to become art collectors. But as more and more of the world’s wealthiest began to imitate their peers and purchase art collections, art became a luxury purchase. Then it became an investment. With the influx of new collectors, an industry grew up around providing expertise, advice and financing. That industry also fueled the growth of international galleries and a global circuit of art fairs.

This new supra-national domain, the art world, functions as its own domain. It’s residents are anyone who joins the migratory circuit. It’s currency is art.

Those lucky or foresighted enough to have already purchased art—particularly Contemporary art—have seen the value of their currency rise. Others, seeing their gains in monetary and status terms, have followed behind, attempting to replicate or exceed those returns. These new buyers exchange their local currency or dollars for art in the belief that art can be turned back into dollars or local currency at a later time. Everyone dreams of big gains, but most will be happy to sell without having lost much of the monetary value. That confidence is especially valuable to a world of  In reality, the vast majority of art is not an asset of any kind.  wealthy persons who are highly mobile, with residences in multiple countries and continents, and somewhat fearful of either local instability or the kind of regional economic uncertainty that is with us today.

In reality, the vast majority of art is not an asset of any kind. Most art is a luxury good purchased from its creator and, effectively, consumed. But the global art market has endowed the work of a small group of artists with the perception of lasting value. These works are seen as having significant and aesthetic value that transcends place and time. As much as one looks for the central authority that confers such value, the process is stubbornly diffuse and passive. Works of art become valuable through a complex and often imperceptible process that makes their value somewhat of a mystery to outsiders.

It’s even a mystery to insiders. Halsey Minor made a small fortune in the first tech boom of the late 1990s. Wary of the lasting value of his dotcom shares, he chose to hide out the bubble burst in American art.

”’When the CNET stock was at $35 to $55 a share, I decided to buy physical assets like art and real estate,” Minor told the New York Times’s Carol Vogel in 2002. “Now the stock is at $3.50.” By trading his overvalued stock for art, Minor preserved some of his wealth.

Buying art may be unfamiliar to most people. Keeping value in a physical asset is not. The simplest thing to do when you don’t trust the financial system is keep your wealth in physical currency. The US eliminated $1,000 and $10,000 notes nearly 50 years ago. Today, the government doesn’t see a legitimate need to transact in those larger denominations. But in Europe you can get still your hands on a 1000 Franc note in Switzerland and a 500 Euro note.

Many Europeans (and others) do. We know that because a full one third of the entire value of the Euro’s currency is in 500 Euro notes. Few ordinary consumers ever see those notes or would ever use them. It’s not even clear one could even walk into a store and make a purchase with a 500 Euro bill. Their only value is as a marker. And they’re used primarily by those who do not trust the financial system.

Art in times of uncertainty

Today we’re in a moment of uncertainty. But in the winter of 2009, it was anyone’s guess whether the global financial system would survive. During that extreme shock to the global banking system—the worst in generations—Christie’s held the spectacular €343 million sale of the Yves St. Laurent-Pierre Bergé estate. (If this November’s sale of the Taubman estate meets Sotheby’s guarantee, it will break the YSL-Bergé sale’s record for the most valuable single-owner collection offered.) St. Laurent was one of the most famous men in the world and the collection he assembled with Pierre  The very wealthy were willing to exchange cash for cultural objects even during a panic.  Bergé contained a very wide range of works of exceptional quality.

That sale’s success showed that the very wealthy were willing to exchange cash for cultural objects even during a panic. Indeed, they seemed eager to get prized art works and rid themselves of mere money. In the six years since that sale, the trend has only increased as the value of trophy works has far outstripped others.

Lest you think this is just something crackpots do with their money, one of the world’s most prominent bond fund managers, Jeffrey Gundlach, recommended his clients should have at least 50% of their assets in something other than stocks and bonds as late as September of 2011, when the world was in the grip of the European sovereign debt crisis. Then, Gundlach, a serious art collector, claimed to have two thirds of his liquid net worth in assets outside of the financial system. He meant “fine art, gold, gems, rental property, etc.”

Curiously, and perhaps as even more evidence that art is a reserve currency all its own, money managers have been launching art funds for more than a decade trying to appeal to those looking for just the kind of diversification non-correlated assets can provide. Try as they might, few of these funds have been able to attract significant investment. That may be because the value of actually owning art itself is greater than the potential return of mere cash from investing in an art fund.

 Infrastructure is what’s needed most now. All of these new collectors and buyers are putting a strain on the art market’s infrastructure. The main players are responding in kind. The auction houses are trying to expand their footprint while controlling costs, including the cost of guarantees that lubricate the very top of the market. Phillips is expanding in a bid to join the duopoly of Christie’s and Sotheby’s. And the gallery world continues to bifurcate into large global enterprises like Hauser + Wirth, David Zwirner, Pace, White Cube and Gagosian and small, focused and opportunistic dealers of all sorts.

Infrastructure is what’s needed most now, infrastructure that creates greater price transparency and confidence either through the more frequent circulation of art works or more information about the art itself.

Whether the value of art goes up or down is far less important than that it can be bought or sold regardless of the prevailing economic conditions. That’s part of what the art market has seen over the last six years since the financial crisis. Rather than the art market freezing amid doubts about the global economy, we see the art market thriving with the potential to become an alternative economy all of its own.

Follow Marion on Twitter at @MarionManeker. We welcome your comments at ideas@qz.com.

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