Investing in art

The best alternative investment:
Art or Gold - Page 2

Risk

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.

Liquidity

Liquidity is probably the greatest shortcoming of art. Selling a piece of art may take months if the collector hopes to maximize its sales value. Quicker sales options are available, but they require a severe discount to implement the sale. A collector may borrow on the art. Banks will make loans, but the rates are similar to those making a personal loans. Auction houses will also lend consignors on their art, but the rates are usually high, and the collector is faced with even greater problems if the piece does not sell.

Of all of the financial investments, gold is one of the quickest and the easiest to dispose. Every major city has dozens of gold dealers who will pay on the spot. The commission they will charge on the spot rate will vary greatly among dealers, so the seller should be advised to shop around.

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Vincent van Gogh
Investment Art Profile


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