What to buy as the art market booms

Sales prices in the art market reached dizzying new heights last month. New York sales at both Sotheby's and Christie's brought in $254.9m and $384.7m respectively. White Center by Mark Rothko set the record for post-war art sold at auction when it fetched $73m, beating the previous record, set just ten minutes before, of $52.7m for Francis Bacon's Study From Innocent X. The contemporary art market is "booming like an out-of-control rocket", says Robert Read, a fine-art underwriter at Hiscox. But what, or who, is fuelling the rocket?

The simple answer is the super-rich. As the rich get richer, they are running out of things to spend their money on. "Russian and Chinese millionaires, along with hedge-fund and private-equity managers, have run out of houses to buy and yachts to launch, and would like to display their wealth on their walls," says The Economist. It seems to make sense purchasing fine art is a way to demonstrate both your lavish wealth and your good taste. And surely art's a great investment unlike the stockmarket, you don't need detailed knowledge or expensive software to know what to buy. Just pick up a Van Gogh or a Pollock and it will go up in price won't it?

Well, there are quite a few Japanese art investors who can tell you that, actually, no, it may not. In the late 1980s, Japanese investors piled into the art market, snapping up trophy art to show off the money they had made on the Tokyo stockmarket. For example, in 1987 a Japanese insurance tycoon paid £20m for Van Gogh's Vase with Fifteen Sunflowers. But then Tokyo property and stockmarkets crashed and took the art bubble with them.

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This time it's different, say the art bulls. A wider range of buyers means the boom will go on. For the first time last month, Sotheby's and Christie's listed prices in roubles, welcoming Russia's billionaires to the art world. Many believe it's only a matter of time before they list in yuan too. But even if the boom does continue, you can't buy just anything. Fashion plays a big role in the art market. In the 1980s, post-Impressionist paintings were all the rage; now it's contemporary works. "Paintings from the 19th century are completely out of fashion," warns The Economist. And the market can turn very rapidly. Last November, Jackson Pollock's No. 5, 1948 set the record for the most expensive contemporary painting ever sold, going for $140m. But last month, two of his paintings failed to sell despite low estimates. The Times is already saying that primal art the earliest known form of art will be the next big thing, pointing to a recent sale at Sotheby's in New York that raised $10m.

So not only must an art investor assess whether there will be anyone with enough money to buy their piece in a few years' time described as "the richer fool' theory" by The Economist but also whether it will still be in fashion. That's no easy task. A hedge fund has just launched that aims to make it easier. The Art Trading Fund will buy art directly from contemporary artists and hedge its exposure using derivatives. But many would argue that this launch suggests we're near, if not at, the top of the market. And besides, surely a key reason to invest in art is actually being able to display and enjoy your purchase?

A better option, if you still want to try your luck, is Newbloodart.com. The site sells works by undiscovered artists for typically between £50 and £500. Founders Sarah Ryan and Ceri Elliston search out "outstanding talent", says The Times. Several of the artists have gone on to have high-profile exhibitions. At those prices, you won't bankrupt yourself if the art bubble bursts. And as the artists are unknowns, you can ignore fashion and buy something that you actually like.

The five biggest art draws

Based on auction sales and market data, the FT found the world's top five living artists on the basis of the top price paid for their works in the last ten years.

1. Jasper Johns, $80m

In 2006, Kenneth Griffin, a Chicago-based hedge-fund billionaire, bought Johns' False Start for $80m. In 2002, David Geffen, founder of Hollywood studio Dreamworks, paid $40m for Gray Numbers (pictured).

2. Cy Twombly, $20m

In 2002, the ex-US army cryptologist sold his 12-panel Lepanto for $20m and Coronation of Sesostris for $10m.

3. Robert Rauschenberg, $12m

In 1996 New York's Museum of Modern Art bought Factum II for $12m. This year his 1959 Photograph sold for $10.7m.

4. Peter Doig, $11.3m

Sold in April, White Canoe broke the record for a painting by a living European artist, fetching $11.3m at Sotheby's.

5. Lucian Freud, $8.2m

Red-haired Man on a Chair fetched $8.2m in 2005, but Bruce Bernard, 1992 up for auction in July should get $9m-$11m.

Impressive but the real price war will not begin until after the artists die. Jackson Pollock's No. 5 sold for $140m last year; Willem de Kooning's Woman III fetched $137.5m.