Modern art: investment or confidence trick?

published 19 September 2008

At the centre of Damien Hirst's Beautiful Inside My Head Forever exhibition this week in Mayfair stood a 680kg bull encased in a tank of formaldehyde. With golden hooves, horns and head-dress, the bull has been christened the Golden Calf, and was expected to fetch between £8m and £12m at auction last Monday night.

In the end, it went to an anonymous bidder for £10.3m, a record for a Hirst. A reproduction of his famous pickled shark also sold well, going for £9.6m. Despite it being among the worst weeks for Wall Street since the 1929 crash, all but five of the 223 lots were sold, raising a record £111m. Sotheby's was quick to declare the auction a royal success, while the art world breathed a huge collective sigh of relief maybe there is still puff left in the contemporary art market.

But aren't they missing the joke here? The point of the original golden calf is that it was a false idol. Surely Hirst is having fun at the buyers' expense. So how long can he get away with it? Well, we'll have to wait to see whether it was genuine collectors or Hirst dealers who were on the other end of those phone lines before we get carried away with this bumper sale. There was certainly enough concern before the auction for dealers to ring around to remind Hirst collectors that it was in their interest to make a splash at Sotheby's, says Ben Lewis in the Evening Standard, if only to prop up the value of their collection. And it was also Hirst and a consortium of his peers who bought his For the Love of God, a platinum skull sporting 8,600 diamonds, which was put up for sale at £50m in August 2007. Meanwhile, there are rumoured to be 200 unsold works worth in the region of £100m sitting in the artist's London gallery, the White Cube.

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Investors aren't convinced the art boom can last, says Lewis they have helped wipe 39% off Sotheby's share price this year already. Despite this week's fanfare, other sectors of the market are already in the doldrums. Between June 2006 and June 2007, the value of a typical old master rose just 7.6%. And although Chelsea owner Roman Abramovich broke the record for the highest price paid for a work by a living artist, when he bought Lucien Freud's Benefits Supervisor Sleeping for $33.6m in May this year, British 17th- to 19th-century portraits and watercolours actually declined 7.5% and 25% in value respectively last year. So when you read about the boom' in the art market, it's really only in modern and contemporary works that this holds true.

The trouble, according to veteran New York art dealer Richard Feigen, is that the value of modern art is too much dictated by the "mafia of the art world" the dealers and curators who have cowed credulous rich collectors into paying absurd prices. They've done this by keeping such a tight rein on the art produced and how much art is seen that they've been able to maintain an illusion that these works are scarce, stage-managing a boom in post-war art.

. That's because they have to be sure that the buyer will continue to swallow inflated prices. Hirst himself knows the importance of this. Sotheby's auction room would have been teeming with heavily invested Hirst collectors, with an interest in maintaining the value of his holdings. "The price of the art itself is a delicate matter it is highly subject to the vagaries of opinion." And in the private viewings, dealers (who get a 50% cut of the final sale price) have been able to dictate that opinion.

When pieces fail to achieve their reserve price at auction, they are quietly sold afterwards for a discount to private collectors. Last year, Christie's raised $542m and Sotheby's $30m in private deals after auctions. With dealers buying up work of artists they're already heavily invested in, there are murmurings that these activities are propping up a collapsing market. "I salute those who have created the merry-go-round the gallery owners, the critics, the auctioneers, the publicists and the artists," says Luke Johnson in the FT. "It has been a wonderful scheme to make lots of money out of almost nothing."

Of course, there have been plenty of oligarchs and petrokings who have been only too delighted to join that merry-go-ground in recent years. In 2006, there were 9.5 million people globally with assets of more than $1m, according to the Merrill Lynch World Wealth Report. Those with $30m or more who were surveyed said they were willing to invest 10%-20% of their combined wealth of $32.7trn in alternative assets half of which are allocated to art. And so the number of wealthy collectors has multiplied 20 times over the past 25 years. The number of museums picking up art has also exploded in that time. Over the past 25 years, more than 100 major new museums have been built around the world, each with the intention of acquiring 2,000 pieces a year, notes Don Thomson in The $12m Stuffed Shark. But with few Old Masters or Impressionist paintings coming to market, the museums have had to focus their energies on getting hold of dramatic contemporary pieces to make their mark. China's nascent modern art market is a case in point between 2005 and 2006, the value of contemporary sales in China increased by 983%.

But this can't continue. For a start, if Hirst's show does anything at all, it demonstrates that the scarcity propping up the market is an illusion. A full 223 pieces of work were produced by Hirst and his assistants over the last two years. As David Fuller of Fullermoney puts it, there's "not much supply inelasticity in that". Dealers might be able to cajole buyers into bidding up an auction, but their power is slipping away. As Richard Lacayo points out in Time magazine, it's hard to see how the mass-produced items, such as the spin drawings and "middling merchandise", can continue to maintain the prices they command.

But it's the sinking of the global economy that is the real death knell for contemporary art. Modern and contemporary art has been bought mainly by those who have made their money in the bull market. After the events of the past week, the hedge-fund managers and investment bankers won't be as keen to splash around what little cash they have left. And what about the idea that the new 21st-century rich the Russians and Middle Eastern monarchs are immune to a downturn and will continue to snap up art? It's a nice thought, but then the same argument was made by estate agents about high-end London properties, yet even the top end of the housing market is suffering these days. These people are not stupid or not more so than the rest of us anyway. If they see the price of art falling, then the auctions rooms will rapidly empty.

It's not as if we haven't seen boom and bust in the art world before. The same process was at work in the late 1980s, when Japanese collectors, their wallets swollen with the profits from property speculation, started snapping up Impressionist paintings. Buyers were notoriously undiscriminating. When asked why he had spent more than $300m on late-19th-century French paintings, Yasumichi Morishita (a moneylender known as "the pit viper") replied that "Impressionist paintings go better with modern decor".

AMR's index of French Impressionists rose sixfold in the second half of the 1980s, but gave up all those gains after Japanese property prices collapsed at the end of the decade. In 1994 Morishita's collection of paintings, once valued at 30bn, was taken by creditors. Between 1987 and 1991, Japan imported around $9bn worth of art from around the world. Just as now, the speculation was fuelled by the flow of easy money as buyers were able to borrow huge amounts to invest in art. But as Robert Hughes pointed out at the time in an article for Time magazine, which pinpointed the top of the market, when you can't borrow, you can't buy.

The closest parallel to the boom that has swept through the contemporary market in recent years came in the last half of the 19th century, according to Ian Jack in The Guardian. Exhibitions at the time were so frenzied that fences had to be built around the pictures to hold back the crowds. But what happened next will be a sobering thought for buyers of contemporary art. Take Alma-Tadema's The Finding of Moses. The picture sold for £5,240 in 1904, then went for a miserly £252 in 1960 more than 50 years later. And Burne-Jones' Chant d'amour sold for £3,307 in 1886 and £620 in 1930.

It takes usually about 18 months after a market downturn before the art market follows, says Jack. For all the support dealers seem prepared to give the artists they patronise, the ruse that has sustained modern art could be close to failing. And the fallout could send a tremor right through the market. According to ArtTactic, a research group, the $500,000-$1m market is already softening. After the 1990 art market crash, even paintings by 20th-century masters, such as Picasso, halved in value over five years and arguably they have lasting value.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.