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Why Have Investment Grade Art and Antiques Skyrocketed in Price Recently?

Why Have Investment Grade Art and Antiques Skyrocketed in Price Recently?

Prices for investment grade art and antiques have increased substantially over the last 15 years.  This phenomenon has left market watchers with a bit of a conundrum however.  These price increases have occurred against a generally hostile backdrop.  For one, the global economy has been stuck in a rut of perpetually disappointing growth since the Great Financial Crisis of 2008-2009.  This sluggish GDP and income growth should have a suppressive effect on the demand for most goods, including antiques.

You would be hard pressed to see it though.  Prices for investment grade antiques have risen by a factor of anywhere from two to four times since the turn of the millennium.  Interestingly, at exactly the same time as this asset class was skyrocketing, its close cousin – the collectibles market – fell off a cliff.  While this development might shock some casual observers, it shouldn’t.  True investment grade antiques, invariably crafted from the finest materials by the best artists of the age, are very different from mere collectibles.

This is an incredibly important distinction.  Investment grade art and antiques possess five crucial attributes: portability, high quality construction and materials, durability, scarcity and zeitgeist.  All antiques that don’t meet these criteria fall into the collectibles category.  This means your aunt’s treasured miniature porcelain cats are considered collectibles while the Duchess of Windsor’s famous gem encrusted panther bracelet is considered investment grade jewelry.  Collectibles, as you can probably guess, are almost universally terrible investments.

In any case, we are left with a nagging question.  If the economy has been so rough for the average man on the street, why have investment grade antiques appreciated rapidly across the board?  It would be understandable if it was only multi-million dollar trophy art that had skyrocketed in value (and it has, but that is another story).  But why have very affordable investment grade pieces costing only a few hundred dollars each increased in value so quickly?

I have observed this phenomenon again and again as I’ve researched different areas of the antique field.  The story is the same regardless of whether I looked at ancient Greek silver coins, vintage European chronograph wristwatches or antique Edwardian diamond jewelry.  They have all risen dramatically in price over the last 15 years.

I think one answer is that bullion prices have increased significantly since 2000.  In that year silver traded for around $5 a troy ounce, gold stayed under $300 a troy ounce and platinum hovered between $500 and $600 a troy ounce.  Today, in mid 2016, those same prices are $20, $1,320 and $1,100, respectively.  This represents an increase of between two and four times, depending on the precious metal in question.  Many investment grade antiques contain precious metals, so it is only reasonable that their prices would be driven in part by the appreciation of their component materials.

A similar situation has unfolded in the colored gemstone market.  The big three colored gems – rubies, emeralds and sapphires – are all considerably scarcer and pricier now than they were 10 to 15 years ago.  Second tier gemstones like tourmalines, fancy garnets, beryls and spinels used to be ignored as too pedestrian.  Now that supplies of good quality rubies, emeralds and sapphires are dying up, these beautiful, but formerly neglected, second tier stones are metamorphosing into gem superstars.  So any investment grade antique that incorporates precious stones has, predictably, shared their price appreciation.

But even the across the board price increases in luxury raw materials can’t completely explain the skyrocketing value of investment grade antiques.  There are other factors at work as well and I believe scarcity is one of those factors.

There is a growing realization in the marketplace just how limited the supply of good investment grade antiques is.  They are rare – very rare.  It simply isn’t enough for an object to be old, interesting or quirky for it to be considered investment grade.  A good rule of thumb is that in any random accumulation of antiques perhaps only 0.1% will qualify as investment grade – and sometimes even less!  This makes these miniature works of art incredibly rare.  But just how rare is something we are still finding out today.  Once investors became aware of this extreme scarcity, prices were bound to rise.

Global investing conditions have also contributed to the inexorable ascent of investment grade antiques.  Since the year 2000 the world has suffered a series of financial crisis, each progressively larger and more destabilizing than the previous one.  Central banks have generally responded by forcing interest rates down to zero – or, in some cases, below zero.  This makes cash an undesirable place to store long term savings.

Average people who just want a safe place to put their money have become increasingly disillusioned with the obvious volatility and risk inherent in traditional paper assets.  But there are few true alternatives to stocks, bonds and cash.  Art and antiques, along with precious metals, provide some of the only asset classes that are beyond the direct control of increasingly unhinged central bankers.

I think these reasons explain why investment grade antiques have appreciated so steadily over the past decade while turmoil has dominated most other markets.  Perhaps even more importantly, I don’t foresee these trends reversing anytime soon.  I believe the prices of precious metals and gemstones will continue to rise.  Good quality art and antiques will continue to become ever scarcer.  And demand from savvy investors looking for a safe haven will continue to increase.  Those who ride these trends will make money.  Those who don’t will ultimately wish they had.

Murphy’s Corollary of Investing

Murphy's Corollary of Investing

Investing can be a complicated endeavor fraught with landmines.  No wonder so many people don’t bother with it, instead selecting the bland default choice available in their 401-k account.  However, there is a little known rule I call Murphy’s Corollary of investing that can help you achieve success over the long term.

Murphy’s Law states that “anything that can go wrong, will go wrong.”  The associated Murphy’s Corollary of investing states that “no popular investment ever produces good long term performance.”  Instead it is optimal to invest in securities and asset classes that are relatively unknown.

The reasoning behind Murphy’s Corollary of investing is very simple.  People have herding tendencies.  They become interested in whatever they hear their co-workers, friends and neighbors discussing.  This holds true regardless of whether it is a movie, website or investment.  So most people tend to pile into whatever investment is talked about the most at any point in time.  In other words, the average investor chases “hot” investments.

In the late 1960s and early 1970s it was “one decision stocks” like Eastman Kodak, Mortgage Guaranty Insurance Company (MGIC), Xerox and Sears.  These companies were called “one decision stocks” because you only had to make the – ostensibly intelligent – choice to buy them.  Then you could just sit back and watch your brokerage account value ascend forever.  And you never had to worry about selling – at least according to the “one decision stock” theory.  These were your forever stocks.

Unfortunately for investors in these particular “one decision stocks”, Eastman Kodak entered bankruptcy in 2011.  Its fellow one-time investment darling Sears is likely to do so shortly.  MGIC had a near death experience during the Great Financial Crisis from which it still hasn’t recovered.  At least Xerox, despite performing rather poorly over the last 50 years, hasn’t seriously flirted with liquidation yet.

In the late 1970s and early 1980s investing in gold and silver bullion was the rage.  Everyone at the time knew the dollar was collapsing and precious metals were the only way to survive the coming financial apocalypse.  I even saw an issue of Good Housekeeping magazine from the period with an article on gold bullion coins – presumably so that housewives could get in on the action!

But the Federal Reserve stabilized the dollar and the financial apocalypse was averted, or at least deferred for a few decades.  Gold and silver then entered a 20 year bear market that brutalized any investor who had been foolish enough to jump on the bandwagon.  Investors who bought because gold was fashionable dearly regretted it later.

Right now Tesla, Amazon and Facebook are some of the current investing flavors of the month.  People say you can’t go wrong buying stock in these companies.  It’s a bold new world and social media, clean energy, biotechnology and other “disruptive” technologies are where the action is.  But I have little doubt that our current crop of must own investments will eventually meet the same disappointing fate as their predecessors.

The unifying theme among all these investments is that they were insanely popular during their time – even though they were separated by many decades.  And it is important to note that their subsequent investment performance was universally bad.  Murphy’s Corollary of investing states unequivocally that you should avoid trendy investments for just this reason.

Deferring to Murphy’s Corollary of investing has worked out rather well for me in the past.  For example, in the early 2000s I became interested in investing in oil and gas royalty trusts.  These passive corporations own royalty interests in oil and gas fields – hence the name.  They receive royalty payments from these interests and pass them onto shareholders in the form of dividends.

I asked my co-workers and friends if they had ever heard of oil and gas royalty trusts before.  I got either blank stares or strange looks. Nobody knew what they were.  They also didn’t care.  The price of oil was low at the time, meaning oil and gas investments weren’t popular, to put it generously.  This helped convince me to buy the royalty trust I was considering.  Within five years it was not only paying out generous dividends, but its stock price had almost tripled as well.

So you’ve never heard of royalty trusts before?  That’s sort of the point.  By the time your local mailman, auto mechanic or dentist is talking about an investment, it is almost certainly too late to make money in it.  The best investments are, almost by definition, those nobody knows about.

That is one of the reasons why I love investing in art and antiques.  It is almost impossible to run afoul of Murphy’s Corollary in the art and antique asset class right now.  Everyone today is infatuated with stocks – and to a lesser extent, bonds.  But no one is giving art and antiques the time of day.  Murphy’s Corollary of investing is practically screaming at us to sit up and pay attention.

The Curse of Unrealistic Investment Expectations

The Curse of Unrealistic Investment Expectations

In the mid 1990s I used to spend a lot of time hanging out at a good friend’s house.  For some reason, his family seemed to accumulate cars in various states of disrepair on their property.  My friend was particularly proud of one of these cars – a mid 1980s vintage Jeep Grand Wagoneer.  One day while I was wasting time at his house, I idly asked how much the car was worth.

My friend replied with some satisfaction that his family’s Jeep Grand Wagoneer was a $40,000 car.  Now, granted, the car was in reasonable used condition.  More importantly, unlike some of the vehicles parked in my friend’s yard, it actually ran.  But I still found it puzzling.  How could this somewhat unattractive but functional progenitor of today’s luxury 4×4 sport utility vehicle be worth a small fortune?  I filed this mental tidbit away, determined to discover the answer one day.

Then, years later, I finally figured it out.  That Jeep Grand Wagoneer wasn’t a $40,000 car – not when it was new and certainly not after it had been used as a grocery getter for 10 years.  In other words, my friend was completely delusional.  But his fantasy of automotive riches is certainly instructional to those of us interesting in collecting art and antiques.

People have a congenital bias towards overvaluing items they own.  It doesn’t matter whether it is a house, car, painting or piece of jewelry.  As soon as an item enters the average person’s possession, it becomes an irreplaceable masterpiece.

Realtors have to deal with this problem all the time.  Half of a realtor’s job is talking people into listing their home somewhere near its market value, rather than a multiple of it.  Sometimes they aren’t successful.  When this happens, the deranged seller usually fires his real estate agent and lists the property as “for sale by owner” – another name for “extraordinarily overpriced”.

This psychological truism is also on full display in the world of art and antiques.  If you ever peruse garage sales, yard sales or eBay for your next treasure you are bound to confront this situation.  An otherwise reasonable little old lady at a church bazaar will adamantly refuse to sell the deformed plastic ring that she fished out of a Cracker Jack box two decades ago for a penny less than $1,000.

No, a plastic trinket isn’t worth anywhere near $1,000, but good luck convincing her of that fact.  In her mind it is a priceless artifact and you are trying to steal it from her for a fraction of its actual value.  Of course the ugly truth is that most antiques or collectibles have a very modest value.  Only the best of the best are really worth big money.

Of course most of these problems of unrealistic expectations can be remedied by purchasing art and antiques from an experienced dealer.  With few exceptions, these professionals have to make a living buying and selling.  Therefore, they are forced to price their wares at or near market value.  If they don’t, they don’t generate enough revenue to stay in business.

As deleterious as it can be to the buying process, the tendency for investors to overvalue their own holdings is even more dangerous to the selling process.  It can render an otherwise reasonable person a raving, obstinate madman.  This is especially the case for illiquid asset classes like art and antiques.  Keeping an open mind and engaging in careful market research before you list an item for sale can help keep your expectations grounded.  Failing that, retaining the services of a professional dealer or auctioneer and selling via consignment or auction can help tremendously.

The story of my friend’s $40,000 Jeep Grand Wagoneer has an interesting postscript.  To the best of my knowledge, the car was eventually hauled off to the scrap yard.  And, no, the scrap yard did not pay $40,000 for it.  But at least some people think a pristine vintage Grand Wagoneer may be worth a small fortune.  Ironically, if my friend’s family had either put their car up on blocks in their garage when it was new or painstakingly restored it to like new condition, it may have actually been worth close to $40,000 today.

Welcome to the Modern Coinage Dark Age

Welcome to the Modern Coinage Dark Age

A dark age is defined in the dictionary as “a long period of stagnation or decline.”  The popular usage of this term is generally applied to the era in Europe after the fall of the Western Roman Empire, from about 500 AD to 1000 AD.  But there are other kinds of dark ages too.  Coinage for example, much like civilizations, can fall into its own dark ages.  And the very first of these coinage dark ages occurred, funnily enough, during the Roman Empire.

The 3rd century AD was a time of profound discontent in Rome.  After the halcyon days of the 1st and 2nd centuries AD which were dominated by the prosperous, largely peaceful reigns of the adoptive emperors, the Empire underwent a crisis.  Barbarian tribes like the Carpians, Goths, Vandals and Almanni assaulted the Romans along the Rhine and Danube frontiers.  Simultaneously, a revived Persia, in the form of the Sassanid Empire, harassed the eastern borders of the Roman Empire.  Rampant plagues and bloody civil wars rounded out this century long disaster for the beleaguered Romans.

It is no surprise that Roman coinage underwent a parallel crisis during this troubled period.  The primary currency unit of the Roman Empire was the denarius, which was traditionally a coin of almost pure silver weighing about 4 grams.  Although introduced during the Roman Republic several centuries before, this Roman monetary workhorse had only undergone modest debasement in the time leading up to the 3rd century AD.

However, the acute economic stress of the 3rd century prompted relentless, irreversible debasement.  First, the hitherto hallowed silver coinage dropped below 50% fineness, to the level of billon.  Eventually, late in the 3rd century AD, the noble, ancient silver money of Rome was reduced to small, crude bronze coins coated with a thin layer of silver.

Now while this history lesson might be interesting by itself, it also has implications for coin collectors and investors.  You see, almost no one wants to collect coins from a numismatic dark age.  They are generally ugly, miserable base metal creations of necessity that hold little attraction for the connoisseur of fine coins.

Roman coinage from the 3rd century AD underscores this point.  The few people who collect these issues do so either to showcase the extreme debasement that occurred over the period or to complete a “full set” of emperors, including the “bad” emperors.  Most ancient coin collectors prefer, with good reason, to stick to the glory days of the Roman Republic or early Roman Empire.

After all, why bother with mean, crude and dumpy coins that signify a civilization in decline when you can instead collect sophisticated, artistic and tasteful examples that represent the pinnacle of imperial glory?

Coinage dark ages aren’t restricted to ancient times, though.  A similar period commenced much more recently for the world in the 1960s.  This was the decade when silver was removed from most countries’ regularly circulating coinage.

For the United States, 1965 was our numismatic annus horribilis, the year silver was removed from dimes and quarters (and greatly reduced in half dollars).  This was a very traditional, if abrupt, debasement.  In place of its time honored 90% silver alloy, the U.S. mint adopted a pure copper core sandwiched between two layers of cupro-nickel alloy.  This new copper-nickel clad coinage was struck in huge quantities to replace its silver predecessors.

25 years ago, in the early 1990s, I frequently read opinion articles by numismatists who repeatedly asserted that these wretched copper-nickel clad coins would one day be valuable in uncirculated condition due to the fact that no one was saving them.  This prediction turned out to be partially correct.  The coins were not saved in any quantity and high quality specimens are, consequently, somewhat scarce today.

But all those predictions about the coins being valuable were dead wrong.  This is because nobody wants them.  Who would willingly collect nasty, copper-nickel clad Washington quarters or Roosevelt dimes from 1965 to the present, when fine silver examples from 1964 and before are available?

More recently, in the 1980s, our present coinage dark age took a turn for the worse when countries around the world discovered they could wring money from well intentioned, albeit ignorant, collectors and investors by over-issuing commemorative coins.  And over-issue commemorative coins they did.

Massive numbers of commemoratives, often in the millions for a single issue, have been struck year after year by mints around the world for the past 30 years.  These modern commemorative monstrosities are often issued to celebrate obscure or inconsequential events, while their designs are typically prosaic and unexciting.  Today’s governments view their mints as profit centers and coin collectors as marks to be shaken down.  It is a pity that the most advanced minting technology in the history of mankind is used this way.

Our current coinage dark age isn’t likely to end soon either.  Recently, many countries have taken debasement to the next – and perhaps final – logical step.  Circulating issues that used to be cupro-nickel or copper have been steadily replaced by nickel or copper-plated, steel-composite coins lately.  These ultra-debased coins are the nasty of the nasty, with effectively no redeeming qualities.

Today’s coin connoisseurs should beware.  A hundred years from now, future coin collectors and investors will undoubtedly look back on the current era as a coinage dark age.  And rightfully so.  Who would want to own these uninspired, base metal monstrosities issued by the million, if not billion?

The answer is obvious: no one.  The savvy investor will take note.  With the exception of perhaps a few bullion issues, there are scant opportunities in modern numismatics.  This is predictable, given that we are currently living through a coinage dark age.