Even so, you may as well call this a record price. In real terms, as Matt Turner at Mitsubishi told me this week, one ounce of silver briefly rose above 40 of today’s US dollars per ounce in 1864, when the American Civil War neared its climax. In nominal dollars, the Hunt brothers’ multi-billion-dollar corner only saw it more highly priced on 5 trading days in January 1980. And while US investors waiting to buy silver are also still waiting for it to record a new intra-day high, it’s already broken new ground against the British pound and for most of the Eurozone, too.

The cause? Gold investors have long tried to explain how the metal is “telling us” something. “First warning” of the looming financial crisis, said Marc Faber in his Gloom, Boom & Doom Report of September ’07, was when “the price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average [because of] ultra-expansionary US monetary policies with artificially low interest rates.”

In which case, and with global interest rates further below zero today after inflation than at any time since 1980, what in the hell is silver telling us now?

“TIPS pay a lower rate of interest than regular Treasuries,” explained Bloomberg News when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.

“[That’s] because their principal rises in tandem with a version of the consumer price index which includes food and energy prices. Rising demand for TIPS [which pushes up prices and so pushes down the nominal yield] indicates investors expect the inflation adjustment to make up the difference.”

What great expectations TIPS buyers must have of Uncle Sam’s “inflation adjustment” today! They’re buying 5-year index-linked bonds with a nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds. And what greater hopes still must the new rush of silver investment hold…rejecting TIPS in favor of metal, and breaking silver’s tight connection with both gold prices and TIPS yields as our chart above shows.

Note the point at which silver breaks higher – right when Fed chairman Bernanke vowed to begin QE2 in summer last year. That a fast-growing nugget of the world’s private wealth is fearful of the result is clear. That silver looks a turbo-charged play is clearer still. Because as an industrial as well as monetary metal, silver is exposed to strong economic growth – as well as loose central-bank policy – in a way that its cousin, gold bullion, isn’t. You could point to 2010’s record levels of Indian and Chinese gold demand coming off their continued economic booms, but Asia’s silver investment demand is surging faster still. And the aim of all this easy money, remember, is to keep GDP stoked, whether in Beijing, Washington, Frankfurt or London.

Little wonder then that Chinese, US, Eurozone and UK inflation is rising sharply. And so no wonder either then that…

• By value, London’s wholesale bullion market last month saw silver volumes jump to one-sixth the daily turnover of gold plus silver, according to the LBMA’s new stats, released to members today. That’s a 13-year high. In raw dollars, silver turnover set new all-time records for the second month running.

• By number, New York’s Comex saw the volume of silver futures contracts overtake the volume of gold futures on Monday and Tuesday this week. By value, silver trading rose to one-seventh of total gold and silver volumes, up from a seventeenth just a month ago.

• ETF Securities say their silver exchange-traded products saw “more flows than any other individual commodity ETP” in the first quarter

• Here at BullionVault – the world’s largest gold ownership service online – our customers have pushed silver trading up from 22% of daily volumes by value in January to 27% in both March and so far in April.

There’s no bull market like a silver bull market, in short – just ask the Hunt brothers ahead of their bankruptcy, eight years after their corner blew up with the big inflation-fueled 1970s’ bull market. Double-digit Fed interest rates popped the bubble back then (plus a good dose of anti-speculative action by regulators and the exchanges, otherwise known as “saving the system” of course. It was sparked in turn by the Hunt brothers’ own naked greed, otherwise known to them as “inflation protection”). The most recent time silver got hot, however, it took oil at $150 and then the Lehman Brothers’ collapse to do to GDP growth and commodity prices what central bankers wouldn’t dare. Because raising interest rates to double digits to kill a “speculative frenzy” wasn’t politically possible.

Silver’s bull run, unlike gold’s, is all about inflation. Which is worth bearing in mind whether you’re quitting, holding, ignoring or looking to buy silver today.

Regards,

Adrian Ash
for The Daily Reckoning

What Is Silver Screaming About? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency’s forex fluctuations.

Tuesday then brought the first of this week’s three new record highs. Only the Indian rupee, to date, has suffered a similar fate.

What next? History says to expect further dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the dollar and gold moving in opposite directions.

But that doesn’t mean non-dollar investors won’t also see fresh gains or highs in gold, however – not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

“There’s certainly investor nervousness about monetary policy around the world since the yen intervention,” as Mitsubishi’s new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

“A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that.”

The Bank of Japan is now actively selling yen to buoy the dollar, while the Bank of England has held real sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May’s Greek deficit crisis, France and Germany would rather see a weak than strong euro, while Beijing’s new “flexibility” – a prelude, perhaps, to its new yen buying strategy – has so far delivered only a 1.4% rise in the yuan’s dollar value since June.

That’s barely a ripple compared with the yuan’s 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

Longer-term, as you can see, gold’s bull market to date hasn’t really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world’s money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world’s top 10 currencies, weighted by size of economy and starting at 100 on New Year’s Day 2000). And most critically for traders trying to second-guess the dollar gold price, throughout 2010 to date – and also across the last four decades as well – gold’s correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).

Regards,

Adrian Ash
for The Daily Reckoning

Gold – All About the Dollar? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

No, he won’t sell yet…if ever…says Bill. But gold’s huge under-pricing a decade ago has clearly passed by. Value-hungry investors got their “reversion to the mean,” and in the form of 400% gains, too. What one ounce of gold bought 2,000 years ago – a good suit of clothes, in Bill’s oft-repeated example – it now matches, if not exceeds in price, here in late 2010.

From here, that makes it a “speculation”.

Never mind that, around the birth of Christ, all clothes were hand-cut and sewn locally…rather than glued together by the world’s cheapest labor, four or eight thousand miles away. A suitable outfit for visiting the coliseum or agora would have been made-to-measure, too…and today’s finest tailors, at least in London or New York, will ask much more than the $1240 you’d raise by selling one ounce at current “spot gold” prices.

Never mind all that. Because Bill’s point is well made, again…

Gold was a screaming buy at the start of last decade, sinking to its lowest price – in real terms – since the early ’70s, as the chart above shows (courtesy of the World Gold Council, and taken from Roy Jastram’s incomparable study, The Golden Constant).

But “Nobody cared! Nobody was interested,” as a (very drunken) London dealer cried at me late last year. “I’d email out jokes, porn-site links, anything to get clients reading so I could repeat three simple words: ‘Buy gold now!’

“But they didn’t care… I don’t even know if they looked at the porn…”

Today, in contrast, you can’t move for anxious investors and bullish hedge funds piling into gold. Or so the media coverage would make it seem. New gold dealers – online and on Wall Street – are meantime sprouting like fungus to catch the “retail dollar”, and the story’s grown so old, it’s even spawned its own calendar for financial hacks (the summer lull, India’s post-harvest festivals, quarterly data from the mining-backed World Gold Council, the Sept-end of each year of the Central Bank Gold Agreement). Wherever you look, the only debate that counts – “It must be a bubble, so when will it burst?” – rolls on for what is now more than two years.

As for the dumb lump of metal, yes – it continues to pull in new money, nudging its purchasing power ever-closer to the big top of 1980. But look again at that chart above. For while Roy Jastram saw a “golden constant” in his two centuries of US data (and four centuries of British gold prices), the shorter-term volatility is striking. Not least since gold ceased being money 39 years ago, and became mere trinkets and collectibles instead.

“In terms of what gold will buy, it does not seem undervalued to us,” Bill Bonner writes. “As near as we can tell, gold is now fairly priced.

“[So] the reward now is different. It is speculative…not inherent. We cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean.”

But what is gold’s mean purchasing power – the “golden constant” of Jastram’s peerless research? By our reckoning here at BullionVault today, it has risen sharply since the US abandoned its last pretence of a gold standard and floated the dollar in August 1971. Compared with the first seven decades of the 20th century, in fact, gold’s real purchasing power has stood more than 75% higher on average. Which seems odd. Because without being used as money – its only utility beyond decoration – gold became only more valuable. So while its purchasing power may have looked “constant” across long historical periods from Roy Jastram’s vantage of 1977 (and again to die-hard gold bugs 20 years later), its utility had in fact changed.

Gold became more useful as a way of storing purchasing power, even though it was no longer money. Or rather, because it was no longer money, in an age where “Every morning, when you look in the mirror, I want you to think ‘What am I going to do today to increase the money supply?’…” as John Ehrlichman, assistant to Richard Nixon, apparently told Fed governor Charles Pardee, sometime in the early 1970s. Post-war economic policy across the West was haunted by the Great Depression, and thus flowed from the fear that, unless money was losing value, then spending and particularly investment growth would grind to a halt.

Without the spur of inflation, capital would choose to sit tight – in purses, pockets and deposit accounts – because its purchasing power today would be retained tomorrow. Savers could thus spend (or not) as they chose, rather than being forced to exchange or grow their money to realize or maintain its present value. Devaluing their money, in contrast, via persistent (and obvious) inflation would force savers into the stores and stock-broker’s office. And thus today’s targets for persistent (and obvious) inflation were born.

“[Harvard professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of its slump,” writes Princeton professor Paul Krugman. “I agree…[but] if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period…[not Rogoff’s] two or three years of slightly elevated inflation.”

Bill Bonner is bang on the money, in short. Gold from here is a speculation, but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.

What price will you assign to gold’s utility as a store of real value if…when…they succeed?

Regards,

Adrian Ash
for The Daily Reckoning

Speculating in Gold originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

HMMMM… This looks telling.

UK banks will soon be able to post raw loans – rather than securitized loans that have been bundled into asset-backed bonds – as collateral against short-term liquidity aid from the Bank of England.

This will mean lending central-bank cash against the commercial banks’ major assets, as the Old Lady of Threadneedle Street puts it, rather than against that sliver of their balance-sheets held as securitized loans. Which seems prescient, for two reasons.

First, securitization of UK consumer, mortgage and business debt has all but collapsed. Net-net, there haven’t been any sizeable securitizations of UK bank lending for six months running – the longest period since 1998.

The two months before that actually saw securitizations paid back, and at the fastest pace on record, down by £26 billion. Which is a pity for the UK’s formerly go-go-crazy-bones credit bonanza.

In the 10 years ending Dec. 2009, securitization added £325 billion to the growth in UK bank lending, expanding new credit by more than 20%. And why not? Securitizing bank loans, by parceling them up and then selling the debt to investors both foreign and domestic, gave banks the chance to lend the same Pound twice, skimming a profit both times. It also gave insurance and pension funds the chance to invest in Britain’s record debt bubble…a boom which ended with more people working more hours to service more debt than ever before in history.

That bout of collective insanity has now got the DTs. Because second, and as a result of securitization’s collapse (or so we guess here at BullionVault), private-sector UK loan growth overall last quarter did what it’s never done before (not since records began in June 1963, at least) and actually turned negative.

The Bank of England’s decision thus looks timely, if ineffective against the credit deflation already underway.

To repeat: UK bank lending to the private sector has never previously shrunk, not in the 47 years of available data. And lending cash to commercial banks Walter Bagehot-style – albeit by accepting their debtors in turn as collateral, and not charging that “high rate” the 19th-century economist recommended either – is what central bankers are for, after all.

Concluding her 3-month consultation with the banking sector, the Old Lady said Monday that she’ll start accepting “raw loans” as collateral for short-term liquidity, dispensed via the Discount Window Facility, in 2011. That expands the list of eligible collateral which banks can post from securitized debt (those asset-backed bonds accepted since Dec. 2007 on top of government gilts), just so long as the loans are residential or commercial real-estate mortgages, consumer loans (but not including credit cards), or corporate loans to non-bank borrowers.

Unlike the Bank’s failed attempt to inject cash into the UK economy via Quantitative Easing, this latest wheeze to underwrite the credit-supply will at least keep the Old Lady’s cash onshore. Because the raw loan’s end-borrower “must be UK-based.” Which should stop the tabloids screaming about “foreigners stealing” this particular chunk of Britain’s monetary easing when it begins.

Whether it stems the UK’s credit deflation remains to be seen. And whether that deflation ever gets to stem the ongoing inflation in prices still awaits history’s verdict, too. Because while private net lending shrank between April and July, quarterly consumer-price inflation meantime rose to 1.3%, knocking 3.3 pence off the purchasing power of each Pound Sterling compared with 12 months prior.

Deflation in credit but inflation in prices? With the fastest GDP growth in four years coming in at 1.1% at market (i.e. unadjusted) prices across the quarter? Economists from Mervyn “monetarist” King to Paul “Keynes re-born” Krugman say this confluence of pain can never happen. So best wheel out the Bank of England’s printing press yet again, just to get reality back on track with theory.

Adrian Ash
for The Daily Reckoning

Credit Deflation Lands in Britain originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The bull market in gold starting 10 years ago is about much more than the Dollar – a fact that investors and savers worldwide might want to consider in 2010 if the US currency continues to rally.

Given G7 interest rates averaging 0.4% too (Reuters’ data), gold looks likely to keep drawing strong bids worldwide.

BullionVault’s Global Gold Index tracks the price of gold against the world’s top 10 currencies.

Weighted by each issuing state’s GDP, its 2010 make-up is based on the latest IMF forecasts. Meaning that the basket is led, as always, by the US Dollar (32%), with the Euro (27%) in second place. Behind that, China (12%) overtakes Japan (11%, down from 18% a decade ago) for the first time this year.

The GGI then includes the price of gold in British Pounds (5%), Russian Roubles (3%), Brazilian Real (3%), Canadian Dollars (3%), Indian Rupees (3%) and finally Mexico Pesos (2%)…thus covering well over two-thirds of the global economy and more than half its population.

Its value? Think of the GGI as gold minus the noise. The index is significantly less volatile on a daily basis than the gold price in Dollars, Euros or Sterling alone. It shows you what’s happening to the price of metal overall – rather like you might track the Dollar Index to see how the greenback’s doing – instead of focusing solely on one single pairing.

And it’s telling us…?

• The GGI outperformed global equities in Q1, rising 4.28% from the close of 2009. The MSCI Barra World Index (local prices) added 4.16%.

• The index has yet to fall for two consecutive quarters since the start of 2000.

• To date, the GGI shows the world’s money en masse shedding very nearly three-quarters of its value in gold since the start of 2000.

Our guess here at BullionVault is that this loss of purchasing power in cash and bank-savings worldwide would require strong, positive real rates of interest – after inflation – to reverse it.

Our second guess? There’s fat chance of that worldwide anytime soon.

Regards,

Adrian Ash
for The Daily Reckoning

The Golden Ruler originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

After all, if the world’s No.1 gold buyers can’t keep up with record-high gold prices, who can…?

But the plain fact, as BullionVault first forecast in spring 2009, is that China has overtaken India as the number one private gold buyer this year. The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond.

Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying – including jewelry and retail investment – is set to have grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 billion or more.

On recent trends, that would equate to more than 2.0% of China’s famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide.

Basis the GFMS consultancy’s data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India’s private demand for Q1-Q3.

Given China’s continued economic growth (certain to hit Beijing’s 8% target according to the Chinese Academy of Social Sciences) – not to mention the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) – private gold consumption in Q4 most likely remained very robust. Whereas India’s private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008’s already disastrous finish.

Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). The running total to end-Sept. was 315 tonnes. It is likely to finish full-year at 431-443 tonnes.

India’s private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS’s data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS’s data.

India’s full-year imports (it has virtually no domestic mining output) are forecast at 370-380 tonnes says the Bombay Bullion Association. They have not been below 400 tonnes per year since at least 1997 according to the Indian Bullion Market Association.

It is impossible to predict the outlook for gold-buying in mainland China next year, but this decade’s drivers for Western gold investment – credit excess and miserable returns to cash – also apply in China, with bells on.

The People’s Bank cut its benchmark rate from 7.5% to 5.3% in Dec. 2008, and has left it there since. Inflation in the cost of living was officially reported at minus 1.1% across the first 3 quarters, but real rates were negative in H2 2004 and again in at the turn of 2007-8. Some analysts are forecasting 4.0% inflation for 2010, and either way, commercial rates have been so attractive this year that new credit growth was CNY295 billion in Nov., equal to $43 billion. That was down from 2009’s monthly average of $130bn, but took full-year credit growth to the equivalent of $1.35 trillion, equal to 27% of GDP.

Pitched against this rampant credit excess, gold’s quasi-religious and auspicious appeal in Chinese culture – as a solid, tangible, intrinsically valuable store of wealth – will only have grown. Most significantly, and in sharp contrast to Indian demand, private Chinese buying has grown as the price has risen (gold has than tripled against the Yuan since retail price controls were lifted in 2001).

That might suggest gold is just another bull-market asset for China’s increasingly wealthy and capital-rich middle classes. But owning the metal is most often viewed more as an end-in-itself than as an investment vehicle; it’s the aim of accumulation, not the means.

Given this last decade’s average 15% annual gains for US-Dollar investors – plus the outlook for sub-zero real interest rates, struggling equity dividends, and the danger of sharply higher bond yields (i.e. falling bond prices) as the Treasury attempts to finance a new record deficit – might the Chinese approach to gold investment start to take hold in the West…?

Adrian Ash
For The Daily Reckoning

China’s 2010 Gold Rush originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“Good art speaks truth, indeed is truth, perhaps the only truth,” wrote Iris
Murdoch in The Black Prince – and seeing how Peter Doig’s “White Canoe” (1990)
was deemed good enough to fetch $11.3 million at auction on Wednesday, that
would mean the only truth today is inflation.

Sotheby’s (BID) midweek sale of contemporary art in London netted £45.7
million all told – some $90 million. Indeed, it was “the most successful
contemporary sale ever staged in Europe,” as the auction house gasped in its
press release. Doig’s “early masterpiece” set a new cash record for a work by a
living European artist, bagging five times its reserve.

Altogether the evening’s sales ran up to 60% higher than the pre-auction
estimates of only four weeks before. How’s that for art appreciation!

It’s proved quite a week for London’s wealthiest art lovers and their
dealers. On Monday, Sotheby’s achieved its highest value auction ever in Europe,
knocking down Impressionist & Modern Art for a total of $173 million. On
Tuesday night, Christie’s achieved $177 million with its own Impressionist and
Modern auction. Wednesday brought Sotheby’s Contemporary sale, followed by
Christie’s auction of Post-War and Contemporary art on Thursday.

That netted $138 million, including a new Francis Bacon record, nearly double
the previous high of $30 million, hit in November.

Four days…one city…$578 million. That’s more than gross inflows for the
entire U.K. mutual fund industry over the same period. But don’t forget
Sotheby’s commission on top!

Sotheby’s and its only serious rival – the privately owned Christie’s – both
bill their vendors 5% of the hammer price. They also charge successful bidders
for the pleasure of watching the gavel come down, an innovation begun more than
three decades ago. And in the last month both auction houses have hiked their
buyer commission rates to 20% of the first $500,000 – up from $200,000
previously – plus 12% of the remaining hammer price.

Caveat emptor applies, in other words, even if the art is to your taste.
Doig’s “White Canoe” isn’t all that bad, but you wouldn’t know it from the
Saatchi Gallery’s description:

“[Doig] paints white like it’s got every color in it; he paints dark like
it’s got every color on it. A mirrored image of a lake at night, “White
Canoe” is a wishful infeasibility where the reflection is more detailed
than the landscape itself. The boat is aberrantly glowing. The landscape has the
all-consuming blackness of an oil slick, deafening and motionless; all other
colors seem to slide across it in a rustic laser show. The blue stains of
tranquil moonlight have the eerie effect of erasing; Peter Doig’s perfect night
seems to be melting like celluloid stuck in the projector…”

This bubble has got nothing to do with the paintings, of course. “Good
business is the best art,” as Warhol said, and the sharpest business minds only
look foolish in the auction room if they can’t settle up afterwards. Sotheby’s
and Christie’s between them control nine-tenths of the world market in art,
furniture and jewelry investment via live auctions.

But even the business of helping Russian billionaires make newspaper
headlines with their disdain for cash can be tough. That’s why, following the
slump in fine art sales that came with the collapse of Japanese real estate and
equity prices in the early ’90s, Christie’s and Sotheby’s colluded in what the
European courts called “secretive meetings” to rig commission rates in their
favor, replacing competition with inflated fees that defrauded vendors out of an
estimated $450 million.

Fair’s fair, we all need to scratch a living, and between 1989 and 1991 -
when Tokyo’s various asset bubbles burst and began dragging the whole Japanese
nation into deflation -the turnover in fine-art auctions worldwide sank by
three-fifths. Things steadily improved as the S&P and then Nasdaq picked up
where the Nikkei had left off. But gross sales slipped again as equity prices
declined, down more than 25% between 1999 and 2003.

For Sotheby’s in particular, the DotCom Crash proved expensive. It began
losing money in 2000, even with the U.S. anti-trust charges of that year ($203
million) excluded. Sotheby’s finally recovered to report a profit for FY 2003,
after the European and Tokyo stock markets had finally turned higher. But the
Board only got round to re-instituting a dividend last August, after a gap of
six years. The third quarter saw 10 cent per share declared – some rate of
return for investors in a business that earned $81 million gross on revenues of
$386 million in the first nine months.

“After the [collusion] scandal died down, Christie’s and Sotheby’s quietly
adjusted their commission rates, independently, so that there were discreet but
not big differences,” says art dealer and consultant Christopher Wood. “The
whole collusion business was simply unnecessary…Christie’s and Sotheby’s are
such close competitors and similar firms that whatever one firm did, the other
was bound to follow. They didn’t need to collude.”

Fast forward to February 2007, and there’s no need to rip off the Russian
oligarchs or City bankers behind this week’s record sales. The “wishful
infeasibility” of London’s art market will do that all by itself. Nor is anybody
accusing anyone of anything besides “depth and strength” in the bidding today -
not even exploitation of a duopoly. Even before last month’s commission hike,
the bubble in financial sector bonuses let Sotheby’s gross $104,000 whenever the
hammer came down for $500,000 or more.

Hedge funds get to take one-fifth of their clients’ profits. Why not milk the
bankers for another grand, too?

“Such incremental revenue dollars, with no associated costs, should drop
entirely to the operating income line,” according to a note from Wedbush Morgan
Securities in January. It failed to use the words “rent seeking”, but if you’re
the right side of the money bubble today, you don’t want to moralize. Sotheby’s
expert valuation and auctioneer staff certainly won’t. Their salary bill rose
22% in the four quarters to September.

And besides, “the percentage of [U.S.] GDP attributable to corporate profits
is near a multi-decade high,” as Barron’s recently reported. “Corporate gains
tend to benefit the affluent through strong dividend growth, capital-gains
income and high-salaried jobs, while restraining working-class wage growth. Ajay
Kapur of Citigroup calls such economic trends ‘plutonomy’ – a global
economy disproportionately geared to the rich.”

The butlers and parlor-maid stocks serving today’s global overlords have
outperformed the S&P for the last 21 years, according to The Daily Telegraph
in London. But Citigroup continues to recommend 24 firms set to cash in further
as the über-rich throw their money around. Sotheby’s is right up there with Four
Seasons Hotel Inc. (FS), Tiffany & Co. (TIF), Polo Ralph Lauren Corp. (RL)
and Coach Inc. (COH).

For a sector apparently awash with high-spending clients, however, there’s
little sign of cash trickling down to investors. Sotheby’s trades for 25 times
trailing earnings – about average for this selection. And none of these stocks
now yields more than 1%.

The only attraction, therefore, must be capital gains, inflated by the stock
market buzz around yet further asset-price inflation in prime real estate,
private jets and fine art. But there will only be fresh meat for the gavel to
beat as long as Wall Street and the Square Mile keep paying ever more in
bonuses. Ten of the 53 buyers in Monday’s auction were first-time purchasers of
Contemporary Art at Sotheby’s, says the auction house. Analysts at Barclays
Wealth Management reckon that, all told, one in ten City bonuses this New Year
will be spent – in part – on investing in art and antiques, according to the
auctioneers themselves.

So while the ultra-high net worth buyers rely on strong energy prices to fund
their collections – the Russian art market rose 2,365% in the five years to 2005
- the newbies in the art market are raising their hands straight after clocking
out for the day at Goldmans, JPM and the rest. As the financial markets go,
therefore, so goes the art market.

“Luxury spending is the first thing to fail when the oxygen goes out of the
economy,” wrote Robert Hughes for Time magazine in 1990. Air was still gushing
out of Japan’s asset-price bubbles, and “art [was] the canary in the mine
shaft.” The little bird stuffed by Tokyo’s plutocrats croaked it on Tuesday,
November 6 at a Sotheby’s sale in New York. The auctioneer – head of Sotheby’s
North America – choked as he cut the asking price for a Julien Schnabel piece
made of broken plates from $650,000 to $210,000. Yet still there were no takers.
It had sold in London the previous year for $225,000.

“The Japanese are awash in money,” one New York dealer had said in 1989. Now
their cheap money pump – flooding the bond, commodity and derivative markets
with carry-trade yen – is washing across Old Masters and New Pretenders alike
yet again.

“All art,” as Iris Murdoch also noted, “deals with the absurd.” If you like
your theatre absurd too, keep an eye on the art market.

by Adrian Ash
February 12, 2007

Wishful Infeasibility: Fine Art and the Bubble in Money originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".