Hi. I read an article relating to the record sale of a Picasso painting and a comment in the article stated that the value of art will remain high unless interest rates fall sharply. Why is this? I...

Hi. I read an article relating to the record sale of a Picasso painting and a comment in the article stated that the value of art will remain high unless interest rates fall sharply. Why is this? I would imagine that lower interest rates assist people to borrow more money to buy art work and also if you have money to invest and interest rates are low, would you not prefer to invest in a high value painting? What is the link between low interest rates and falling art prices?

Thanks

Tyrina

Asked on by badfanta

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

I am inclined to think that they man who is quoted in this article misspoke.  There are two reasons why I would say this in addition to the points that you make in your question.

First, it is very odd to have someone today talking about the idea that interest rates would “drop sharply.”  The reason for this is that interest rates are extremely low as it is.  As you can see in this statement by the Federal Reserve, the Fed’s target for the federal funds rate is between 0 and .25%.  Obviously, it is impossible for rates to “drop sharply” from that level.  Of course, the federal funds rate is not the same as the rate that people actually have to pay to borrow, but it is still hard to imagine that interest rates could “drop sharply” even in the private sector.

Second, it seems to me that art is something like gold in that one would invest in it as a store of value.  When interest rates go up, people tend to get out of gold because they feel that they can get a higher return from other investments.  I would think that a similar dynamic would apply to art.  Art seems like an investment that might not tend to get as high a return as, for example, stocks would in good times.  Therefore, I would think that art would behave like gold and would tend to see its prices weaken when interest rates rise, not when they fall.

So, I wonder if the art dealer quoted misspoke and the people who wrote and edited the article did not catch the error.

Sources:
ericjohnlarge's profile pic

ericjohnlarge | (Level 1) eNoter

Posted on

I think that gold prices fluctuate in relation to other commodities derived from natural resources. Gold is only one of other assets that are in high value by individuals, States, or corporations. Comparing gold, interest rate changes, and priceless art work is challenging. I think that each of Picasso's art pieces are one of a kind and that situation cannot be compared with gold or discussed with interest rate changes. While gold is a well-known commodity, Picasso is a preeminent artist whose art is priceless and incomparable.

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