Volatility is an intrinsic part of any financial market. It can negatively affect investors’ confidence. It can also be a positive phenomenon because it provides arbitrage opportunities for those in the know. The highly inefficient art market, estimated by Clare McAndrew at c. USD 63 billion (globally, 2014), has seen a remarkable increase in volatility in certain sectors, particularly contemporary. The historical notion that art is an ever-appreciating asset, is slowly disappearing. These days a 17th Century Old Master can go for less than a painting by an artist straight out of college.
Any market is a function of supply and demand. Limiting supply means price control. Looking at contemporary art, for example, artists tend to overprice their work. They also price inconsistently. Therefore, one of the main functions of the gallery that represents them is to control the artist’s prices and inventory. The price level for an emerging artist is low. It is gradually increased by the gallery as the artist establishes himself, resulting in - by control rather than the market - an upward price trajectory over the course of the artist’s career.
That said, the nature of the art market has changed significantly over the last 10 to 20 years: from a small number of highly informed art connoisseurs to a global, homogenized audience that buys brands and household names. The drivers of value in the art market have to some extent shifted from deep subject knowledge to effective branding and marketing, which artists like Hirst and Koons understand so well.
Furthermore, the art distribution model has changed ever since Hirst bypassed his gallery, White Cube, to sell directly through Sotheby’s in 2008. Normally the artist’s gallery carefully places works with trusted and well-known collectors in order to build the artist’s resume. Selling at auction has the potential to speed up this process but at the same time an unsold work has a detrimental effect on the artist’s prices. This increased volatility is a direct result of the gallery’s diminished price and inventory control during the early years of an artist’s career.
So what does this mean? Does increased volatility say anything about the underlying quality of the art? Not necessarily. There is just a lot more noise because the art market is in flux: more and different buyers, shifting distribution channels and less control of pricing and supply. You can still do really well in the art market if you have a good advisor who gives you access to great opportunities and facts you need to know in order to make an informed purchase decision. Just remember that art does not always go up in value, it moves in cycles, like any other market.