Investing In  Art
Pablo Picasso
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• Claude Monet

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Reference Sites

• Art Auctions of America

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Best alternative investment:
Art or Gold?

Even with the stock market at historic highs, investors are still seeking alternative financial assets to diversify their portfolio. Among these possibilities, investment in gold and art are frequently considered. In the broadest terms, they are both commodities in that they are real and not financial assets. Both possess value beyond their financial value. Gold has a wide range of industrial usages and art is valued for its aesthetics. Both are also subject to wide price fluctuations, but with significantly different causes.In comparing gold and art as investments, five criteria are considered: rate of return, risk, liquidity, transaction costs and maintenance costs.

Rate of Return

Gold or Art - The beter investment

Calculating the rate of return for gold is fairly straight forward, and over the last 25 years the rate of return has been almost 5%. Art is much more difficult because of the trouble in defining the asset group. Because we are looking at art as a financial asset, the relevant art bundle would be investment grade art. This is the art that is sold by the major art auctions of major artists who are probably dead. Thus, the supply of this art is limited and price is largely a function of demand.

Admittedly, this criteria is not precise. There have been several indexes created to measure the changes in art prices. One the most respected indexes of investment grade art is the Mei Moses All-Art Index. The index was developed by two New York University professors, and is often quoted as the most reliable in describing art price fluctuations. This index indicates that art prices have almost matched the performance of stocks, and that over some periods the rate of return on art has beaten the stock market. This would put the annualized rate of return somewhere close to 6%. Other estimates for price growth in art have not been so optimistic. In fact, some estimates place the rate of return near zero. A study directed by Luc Renneboog at Netherlands, Tilburg University estimates the rate of growth from 1970 to 1997 to be around 4%. We can speculate that the long-term rate of return for investment grade art is somewhere between 2% and 6% with 4% probably a fairly decent estimate depending on the art bundle. So in terms of rate of return, gold and art are approximately the same although gold might offer a slide edge.


When we talk about risk, there are two kinds. There is financial risk which pertains to the variability of return or the volatility of returns, and there risk of fraud in which case the return of the asset might be zero. Although there is a common misconception that stocks are highly volatile, both gold and art have shown to be more volatile. Depending on the statistical measure of volatility, gold and art volatility are very close with art somewhat less volatile than gold.

Both art and gold carry fraudulent risks. For art the risk involves the authenticity of the art while for gold the problem is with counterfeit coins and bars. When art and gold are purchased from dealers, the buyer assumes they are getting what the dealers say they are selling. This isn't always the case.

With art there is not only the problem with authenticity but also with title. The buyer assumes the dealer has title for the piece. Art dealers have been known to accept pieces from collectors on consignment, and fail to pay the consignors when the work is sold. Also in the case of art authenticity, the value of a piece of art can be squashed by one expert opinion. Even the most sophisticated auction houses have sold work that turns up to me bogus. Art forgers are very good of what they do.

In the case of gold, the major issue is counterfeit coins, and the frequency of its occurrence has increased dramatically in the last ten years as the technology to produce fake coins has improved. Both gold and art are susceptible to fraud, but art carries a much greater risk because authenticity it often a matter of subjective opinion. Gold is gold or it is not gold.

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