Last week, a Picasso painting was bought for a record $160 million, becoming the most expensive artwork sold at auction in history. What does it mean for the outlook for gold prices? Are there any connections between art and the precious metals market?
On May 11, Christie’s, the legendary auction house in New York, sold Picasso’s 1955 Les Femmes D’Alger (Version O), from his series known in English as “The Women of Algiers”, for $160 million plus commission of just over 12 percent (the final price was $179,3 million). The auction also featured Alberto Giacometti’s sculpture Pointing Man, which set its own record ($141.3 million) and became the most expensive sculpture to be ever sold at an auction.
Why are we writing about the art market in the Gold News Monitor? Do not worry, we are not going to analyze the aesthetic value of cubist painting. We are covering this issue, because there are strong arguments that the record art sales are the leading indicator for the stock market. According to Jason Goepfert, stocks tend to struggle in the months following big records in art sales. Just as a reminder, art sales peaked in 2007, when Sotheby's and Christie's sold a combined $11.3 billion worth, while two years later, in the wake of the financial crash, total sales plunged to only $4.8 billion. The sale of high end art has more than doubled in price volume since 2009 and the total value of the global art market surpassed €51bn in 2014 to its highest level ever.
The art market boom is caused by the excess liquidity and the ultra-low interest rates. Easy money always flows to the latest speculative fashion, be it tulip bulbs, or cubistic paintings. The rationale for this is simple. Assets price bubbles are associated with quick fortunes, rise in income and wealth of asset owners, and luxury spending booms. Luxury spending has surged globally since the last crisis. And the art market is an excellent indicator of the speculative mood, because artworks do not pay any dividends, so their prices depend completely upon expectations of further price appreciation (i.e. finding a greater fool). Another reason for an art market boom is that artworks are considered “real goods” or “hard assets” (just like real estate), which hold value and cannot be devalued like fiat currencies. This is why the prices of art usually rise as a result of money printing.
Therefore, the recent record art sales reflect the bubble in the art market and indicate overconfidence in the stock market. Indeed, more and more analysts are warning against a stock market correction. Just yesterday, the Bank of America Merrill Lynch noted that U.S. stock prices are at record highs and warned against a drop in asset prices. Thus, the strategists “advise selling risk into strength, buying volatility into weakness, advocate higher than normal levels of cash and would add some gold”.
The key takeaway is that recent art sales (like Picasso’s painting sold for $160 million plus commission) reflect the bubble in the art market, which may indicate overconfidence in the stock market, since record art sales are a leading indicator for the stock market, and stocks usually struggle in the months after such sales. More and more analysts are warning against a possible correction in stocks, which should be positive for the gold prices.
Picture 1: Pablo Picasso’s The Women of Algiers (Version O)
Source: wikimedia.org
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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