Here is a thought experiment. What happens to the art and antiques market when they are finally discovered by the broader investment community? As an example, let’s assume you can currently accumulate Venetian ducats (a high-denomination trade coin struck in gold by medieval Venice) for anywhere from $500 to $600 per coin. Then one fine day a single pioneering hedge fund starts buying up the coins.
The immediate consequence is that Venetian ducats will disappear from the market almost immediately. Unless the acquiring hedge fund is both incredibly discreet and sensitive to the realities of the fine art market – a possibility I find most unlikely – my best guess is that the Venetian ducat market will have been picked clean within a couple weeks. At first, no new supply will appear. Then, very slowly, a trickle of new pieces will come to market. Only the pricing won’t be $500 to $600 for each coin. Instead new sellers will test the market with pricing of perhaps $1,000 to $1,200 each. The acquisitive hedge fund won’t think anything of paying twice the price for these medieval numismatic works of art. After all, they were sorely underpriced at their original valuation of $500 or $600 a coin!
So our theoretical hedge fund will keep buying and, predictably, the new sources of supply available at the higher prices will gradually become exhausted over the period of maybe a month. Then a new tier of supply will trickle into the market, except this time asking $1,500 to $1,800 per coin. Our nameless hedge fund may hesitate at this point, allowing this new supply to sit largely unpurchased at its new higher price for a time. But by now the original hedge fund’s ruthless competitors will have shrewdly divined its exotic asset accumulation plans and quickly follow suit. Therefore, our latest tier of supply will disappear almost instantaneously and prices will rise stunningly fast – first to $2,000, then to $2,400 and finally to $2,800 per coin – all in a matter of weeks. Finally, as buyers become satiated, prices will drift down over the next few months from their recent highs to stabilize at maybe $2,500 a coin.
And there is our hypothetical situation if traditional asset managers get even peripherally involved in the art market. Venetian ducat prices skyrocket from $600 to $2,500 a coin – an increase by at least a factor of four – within about 6 short months. Under this scenario there would be precious little possibility of accumulating new pieces during the market turmoil. You will most likely either be in at the low starting prices, or on the outside looking in once the fireworks start.
I also assume that it is only a handful of niche hedge funds throwing only a few million dollars at this particular segment of the market. If large pension funds, endowments, exchange traded funds or mutual funds became buyers, then all my predictions go out the window as they have tens of millions or even hundreds of millions to potentially allocate! It is also important to keep in mind that if a part of the hedge fund community decides to accumulate Venetian gold ducats as an investment, they would undoubtedly be purchasing other fine art and antiques too. Thus we would probably see sudden scarcity and rapidly rising prices across several market areas simultaneously.
