Investing in Gold vs Art: All You Need to Know
PBurgess Gold and art are both promising alternative investment classes. However, the two differ in more ways than one — especially in terms of their returns.
From 2000 to 2018, the Artprice 100 index grew by 8.9% yearly, while the gold price had an annualized growth of 6.36%.
In this article, we’ll cover all you need to know about investing in gold vs art.
We’ll show you why fine art is an attractive asset class and give you four tips to remember before making your first art investment. We’ll also introduce you to Masterworks — a platform that allows you to invest in shares of art, hassle-free.
Investing in Gold vs Art: 3 Key Differences
Here are the three main differences between gold and art.
1. Consistency of Returns
Gold investment assets are known to provide financial security, especially during times of high inflation.
But has the price appreciation of gold been consistent?
Here are some instances that prove otherwise:
- From 1980 to 1984 (when annual inflation averaged 6.5%), the gold price actually fell by an average of 10% annually.
- The price of gold fell by an average of 7.6% each year from 1988 to 1991 — while inflation averaged 4.5% annually.
- In November 2022, when inflation was at its highest levels in years, gold prices remained relatively flat, with no good investment returns for investors.
In contrast, fine art has delivered consistent returns over the last few decades and continues to do so today.
According to a 2020 Citi report (based on data from Masterworks’ indices), contemporary art investors have enjoyed annualized returns of 11.5% from 1985 to 2020.
During the same period, gold investment assets only returned an average of 3.2% per year.
2. Resilience to Market Fluctuations
Gold is used as an investment, raw material, and alternative to fiat currency in many markets worldwide. Gold is also considered a highly liquid asset since it’s always in high demand and preserves its intrinsic value well.
Until the 1970s, central banks worldwide (including the Federal Reserve) used gold as backing for their fiat currency. That’s because the precious metal was considered to provide great financial security.
However the price of gold has been highly volatile over the years. While gold has generally beaten inflation since 2004, the precious metal has shown a standard deviation of 17% on its monthly returns.
For example, between November-December 2021, the price of gold increased by 4.7% (from $1,780 to $1,865) and dipped again below $1,780. Then it climbed 2.5% back up to $1,825.
The contemporary art market on the other hand is more resilient to market fluctuations. For example, the 2008 financial crisis caused global art auction values to drop by 44% in 2009. However, these values normalized again in 2010 — reaffirming the intrinsic value of art.
3. Methods of Investment
There are different ways to invest in these two assets. Let’s look at the most popular choices.
A. Ways to Invest in Gold
Here are three ways you can invest in gold:
1. Purchase Physical Gold
Any investor can buy the physical metal in the form of gold bullion (this includes gold coin, ingot, and gold bar assets).
Some people also buy gold jewelry to hold as a tangible asset. Investors of physical gold can also purchase other precious metal types and rare commodities like silver coins or diamonds.
When purchasing gold coin and gold bar assets, ensure that you buy only from legitimate dealers. Also make sure to arrange proper storage and insurance for your physical gold collection.
2. Invest In a Gold ETF
Gold bullion coins and bullion bars aren’t the only ways to start investing in this precious metal.
A gold ETF (similar to gold mutual funds) allows you to enjoy a good investment return without going through the hassle of purchasing physical gold.
These stock market funds invest in various gold-backed assets and derivatives. Some ETFs trade gold mining stock, while others simply track and mimic the price of physical gold.
When investing in a gold ETF, consider the reliability of the fund and its management fees.
3. Gold Futures
Some stock market traders even invest in gold futures — going beyond ETFs and mutual funds.
Gold futures are contracts that allow any investor to purchase gold in physical metal form (like gold bullion coins and gold bullion bars) at a prearranged price on a future delivery date.
If you’re unsure how to invest in gold futures on your own, you can reach out to a qualified financial advisor with good investment experience to handle your portfolio.
3. Stocks Of Gold Mining Companies
Purchasing gold mining stock is another way to invest in gold without buying the physical metal.
Gold mining companies can:
- Profit more when the price of gold increases — increasing their intrinsic value and share price.
- Cut costs to maintain profitability when the gold price falls.
- Pay dividends and provide returns in fiat currency.
You can’t find these benefits with other gold investment methods like buying the actual tangible asset. So gold mining stock assets can be an attractive option for investors looking to get into gold.
B. Ways to Invest in Art
Here are three ways you can invest in art.
Art investment platforms like Masterworks help you invest in shares of blue-chip artwork by famous artists like Andy Warhol, Mark Rothko, and others.
What is Masterworks?
Masterworks is a pioneering art investment platform that helps you invest in fractional shares of iconic artworks by artists like Pablo Picasso and Andy Warhol.
How does Masterworks Work?
- Masterworks acquisitions team locates an authentic art piece they believe could appreciate in value and purchases it.
- Masterworks files an offering with the Securities and Exchange Commission (SEC) to securitize the artwork.
- After investing in the shares, you just need to wait. Masterworks may hold the painting for 3–10 years. If the piece is sold at a profit, you’ll receive pro rata returns after fees are subtracted (1.5% annual management fees plus 20% of the profit from the sale of the artwork).
- Or, you can sell your shares on the secondary market.
- Masterworks has a straightforward fee structure. Annual management fees are 1.5% a year (paid in equity). There’s also a fee of 20% on any profits realized from liquidating the paintings.
All you need to do is get started by completing Masterworks’ membership application.
2. Purchase Individual Art Pieces
The most popular way to invest in art is by purchasing physical art pieces.
You can purchase artwork through art dealers, exhibitions, private sales, and auction houses.
When you purchase physical art, you get to pick pieces you connect with. However, finding artwork with high value potential can take a lot of time and effort.
And unlike other investments, you’ll have to hold on to your purchased artwork for years before selling it at a profit.
3. Invest In Art Funds
Unlike stock funds, art fund establishments aren’t traded on traditional investing platforms.
However you can invest in companies that buy, hold, and sell various works of art. These companies usually conduct their own research on the pieces they want to invest in.
Most art funds have online platforms where you can sign up and start investing easily. When art funds liquidate paintings, you obtain a part of the profits.
Why Fine Art Is an Attractive Investment
Here’s why fine art may be a more attractive investment than many other asset classes:
1. Low Correlation To Traditional Markets
Traditional financial markets usually have high volatility. After 2022 was reported as one of the worst years in Wall Street history, a favorable inflation report sent stocks surging.
However, the art asset class is less correlated to traditional investments and relatively resilient to market volatility.
For example, from 2007 to 2009, the S&P 500 dropped by about 57%, while global art auction prices declined by 27%. By 2011 the art auction market was back to pre-crisis levels, while the S&P 500 was still struggling to recover.
2. Demand For Art Is Increasing
The demand for the art asset class has increased significantly over the last few decades.
This is mainly because investors use art to create better investment strategies to diversify their portfolios.
In turn, art prices have also skyrocketed.
According to Masterworks’ internal research, art prices have increased by over 1,000% in the last 40 years.
Additionally, as paintings age, they become rarer, often fetching millions of dollars at auctions.
Demand for art can be volatile over short periods. However, a medium to long-term investment in an artwork can help any investor take advantage of the overall positive price trends.
3. Investment Portfolio Diversification
An alternative investment like art can help you devise a better investment strategy and diversify your portfolio — making it more resistant to market movements.
In times of uncertainty, traditional assets like stocks, bonds and real estate could decrease in value, weakening your investment portfolio. During these unstable market cycles a tangible asset like art can provide you with a degree of financial security.
Adding a less volatile alternative investment like art can be a better investment decision than just sticking to traditional stock market investments.
4 Important Points to Consider Before Investing in Art
While investing in art is a great way to diversify your investment portfolio, there are some risks you have to be aware of:
1. High Transaction Fees
Since the art market isn’t regulated, there are no limits on painting prices and fees charged by sellers.
Art dealers usually mark up paintings by as much as 50-100%.
Even auction houses charge significant sale fees. A typical buyer’s premium would be around 12% to 25% on the hammer price. They can also add insurance, storage and online bidding fees to the purchase price.
2. Long Holding Periods
While art has shown great returns over the long term, it’s not an investment you can use to profit overnight.
Many art experts advise their clients to hold art for a minimum of 10 years, especially if they purchase artwork from recently discovered artists.
If you decide to invest in physical art, you should be prepared to deal with the illiquidity of the art market and hold your investment for years or even decades.
3. Expert Knowledge Required
Investors get access to tons of information when it comes to traditional assets like equities, bonds and even new markets like cryptocurrencies.
However, the art market isn’t so open. Knowledge is shared among a select group of experts, art buyers and dealers.
To obtain art with high appreciation potential, you will need to conduct extensive research or have access to insiders that can help you acquire attractive works of art.
4. Potential for Fraud
It can be hard for a beginner to know who to trust in the art world. Especially when it feels like so much knowledge relies on the opinions of a select group of experts.
Here are a few infamous incidents of art fraud:
- Knoedler & Company sold a client $70 million of fake Jackson Pollock, Mark Rothko and Robert Motherwell paintings. The ensuing litigation forced its closure in 2011.
- Yves Bouvier, a high-profile art dealer, has been accused of defrauding over $1 billion from Dmitry Rybolovlev through the sales of 38 paintings.
Fakes have fooled even well-meaning art sellers.
- In 1995, Christie’s sold a fake of Girl with Swan by Heinrich Campendonk along with some other forgeries.
- The auction house had also sold a Marc Chagall fake for $450,000 in 1997. When this was discovered, the auction house returned the buyer’s money and rescinded the sale.
While art and gold are both lucrative alternative assets, they’re different from each other.
They have varying returns, volatility and ways you can invest in them. As an investor, you might want to invest in both of these assets to diversify your portfolio.
But if you want to invest in art, check out Masterworks.
Investing involves risk. See important disclosures at masterworks.com/cd
*[Please note: All investing activities involve risks and art is no exception. Risks associated with investing through the Masterworks platform include the following: Your ability to trade or sell your shares is uncertain. Artwork may go down in value and may be sold at a loss. Artwork is an illiquid investment. Costs and fees will reduce returns. Investing in art is subject to numerous risks, including physical damage, market risks, economic risks and fraud. Masterworks has potential conflicts of interest and its interests may not always be aligned with your interests.
Liquidation timing is uncertain. Expenses and fees are listed in our Offering Circulars. Note: Fees are 1.5% per annum (in equity), 20% profit share, and certain expenses are allocated to the investment vehicle. Investors should review the offering circular for a particular offering to learn more about fees and expenses associated with investing in offerings sponsored by Masterworks. Masterworks will receive an upfront payment, or “Expense Allocation” which is intended to be a fixed non-recurring expense allocation for (i) financing commitments, (ii) Masterworks’ sourcing the Artwork of a series, (iii) all research, data analysis, condition reports, appraisal, due diligence, travel, currency conversion and legal services to acquire the Artwork of a series and (iv) the use of the Masterworks Platform and Masterworks intellectual property. No other expenses associated with the organization of the Company, any series offering or the purchase and securitization of the Artwork will be paid, directly or indirectly, by the Company, any series or investors in any series offering. For more information, see “IMPORTANT DISCLOSURES” at Masterworks.com/cd
This post was sponsored by Masterworks
