In times of high inflation, investors can have a preference to move part of their wealth to tangible assets, like gold, property, and art.
This is because inflation erodes the purchasing power of cash, as the goods and services purchased with cash become more expensive.
Even the value of cash held in interest-bearing bank accounts, term deposits, or bonds is hardly protected, as the interest earned is typically far less than inflation. For example, the gap between interest rate for US saving accounts and the inflation rate in the US, at this very time, is hugely exaggerated. The headline inflation rate to July in the US is at a 40-year high of 9.1%, while the more generous interest rates that US banks offer is around 2.0%.
So, what can you do to hedge against inflation eating into your hard-earned wealth?
The answer may be to invest in hard assets like art.
This is because the value of art when examining its potential sale price can increase in line with rising prices. Inflation can be thought of as the condition where the number of dollars (or whatever appropriate currency) in an economy increases while the number of goods and services stays the same. Thus, when inflation is high, your unique artworks can attract more dollars because they are available to consumers to acquire goods and services.
For clarity, this is a simplified version of the story, but the fundamental idea stands.
On the other hand, inflation can reduce demand for non-essential goods like art, as consumer’s disposable income gets sucked up by the rising price of essentials. In this case, the choice of art that you collect becomes critical, with art that experiences little or no reduction in demand performing the best. Essentially, you want to collect art that appeals to collectors that are less affected, and can weather the rising cost of essential goods.
Other than inflation, a few other variables contribute to the pricing of artwork.
As noted in How to negotiate the price of an artwork, artwork is priced differently from other goods which typically have a more obvious use or standardization. With art, two same-sized oil paintings of the River Thames are not priced the same if one of those paintings is done by William Turner, and the other an artist with no profile. Many variables go into pricing an artwork, some mysterious, some conventional, but most the critical element might be ‘demand’. And with this being so, a case can be made for arts appropriateness as a hedge.