Arty Investments

THE PARTY STILL AIN'T OVER

Art dealers are rarely happy. The trade suffers either from loads of money around and no pictures to sell, or from too much to sell and nobody to buy.

2006 and 2007 will go down, therefore, as rare years of bliss. What's more, despite a bout of nerves in the wake of the Sub-Prime credit crunch, the year end produced another string of astonishing auction records. Art has never, but never, had it so good. The rich are awash with cash, the Forbes 400 are all dollar billionaires and the art market and real estate are their prime targets, rather than Wall Street. The annus mirabilis of last year saw new records set of nearly €100m for Jackson Pollock, €98m for Picasso (pity that owner Steve Wynn put his elbow through the canvas and the sale was aborted), €97m for a 1950s big brush Willem de Kooning and €95m for Gustav Klimt's most elegant female portrait. All that took place behind closed doors. In public, the auction rooms managed €67.1m for Picasso and the same again for Klimt.

It is the art market Himalayas. The financial mountain peaks of the late '80s – Van Gogh at €58.2m, Renoir at €55m – have grown by 10% in real terms. As before, the main price growth is in European paintings from Monet to Picasso, 1870-1970 and in American paintings from Pollock to Warhol, 1945-89. But new 21st century foothills are rising in Indian, Middle Eastern and Chinese contemporary art and in early 20th century Russian paintings (see sidebar). The speculators are moving in across all fronts.

How has the great art rise happened? It's the classic reason: the securities markets have failed. The Dow Jones averaged 11,281 in January 2000 but rose no higher until April 2006. Going further back, the Dow rose a handsome 7.5 times in real terms between the mid-1980s and 2000, which was excellent news if you spotted the low and got out at the high. But if you placed your investments across a different span, the Dow did not grow at all for you in real terms between 1965 and 1995. No wonder that after Wall Street's plunge on Black Monday in October 1987, art staged its steepest rise of the 20th century – lasting a full 31 months.

'Art for art's sake and all that, he knew, was cant,' writes Galsworthy of the investor Soames Forsyte in the famous novel. It was then and still is about Art for Money's Sake.

For financiers, the great thing about pictures is that they do not trade in the real world as a company does. They carry few costs and they hire no labour. They do not report to the authorities and quite often they don't report to the taxman. Their price? Anything you want, mon chere; the price of art is wish fulfilment.

At Sotheby's Contemporary Art sale on 7 February 2007, cash, wish fulfilment and fantasy were nakedly on view. 'Lot Nine,' solemnly intoned Tobias Meyer, Sotheby's chief auctioneer, 'Peter Doig's White Canoe. £400,000 [€574,500] to start it?'

This is a picture which was sold by the young Edinburgh artist for £2,000 or less immediately after it was painted in 1990. Since then Doig, who paints mysterious landscapes as though seen through the eye of a watching animal, has become a cult figure, mainly because collector Charles Saatchi has moved in on him. Probably because Saatchi was part owner of the White Canoe, Sotheby's put an estimate of £800,000-£1.2m (€1.15m-€1.7m) on this picture and announced it in the catalogue to be 'quite simply Doig's masterpiece'.

Four hundred thousand? Five minutes later Tobias Meyer, his bow tie quivering, had knocked it down for £5,830,000 (€8.37m). Five million? This is a price higher than anything achieved at auction by Doig's eminent British contemporaries Lucian Freud and David Hockney and exceeded in 400 years of British art only by Francis Bacon, John Constable, Sir Joshua Reynolds and JMW Turner.

Yes, it's mad but no, it's not. Only art can do this, but everyone was a winner. The sellers were obviously thrilled. They just happened to be a joint pairing of Saatchi and Sotheby's itself, which had taken an interest in the Doig. The profit on £2,000 in 1990 was 291,500%, or 19,433% a year. The buyer was a winner, even though he paid six times estimate; he will be focused not on the purchase price but on 500% profit within ten years. The 1,000 bidders in the saleroom who whooped and applauded all won, not because they own Doigs themselves but because they own British stuff like it which they hope is similarly heading up the hill.

In art terms £5,830,000 makes small sense, if not total nonsense. It is exactly twice as high as the dearest Gainsborough sold at auction. Even Sotheby's could not bring itself to justify it. Invited at a press conference to declare that the 47-year-old Doig was somehow of greater importance to 20th century art than Freud, half a dozen of its leading experts found frogs in their throats.

'Masterpiece', however, the description deployed in Sotheby's catalogue, is a trigger word to speculators, who see financial safety in placing money only in the very best; and the art market has a long track record in masterpieces attracting speculative sums. It's hard to believe that artists once starved in attics.

Globalistion is the other driver of this bull market, and apparently it has only just begun to gather steam. Sotheby's held three contemporary art auctions in October, just as critics started to insist that a price crash was imminent. But the sales broke a dozen records and Robin Woodhead, CEO of Sotheby's International, noted merely that 'the base of our business is broader than ever before.' He was referring to the world record at auction for a Chinese contemporary work of art – Yue Minjun's Execution sold for €4,211,000 – and the world record for an Indian work of art, Raqib Shaw's Garden of Earthly Delights III selling for €3,890,000. If that wasn't enough, the series of auctions ended with a record sale of 20th-century Italian art in London, netting €21,828,000 versus a pre-sale estimate of €14.36m.

In fact the only sign of change was a sense at the Frieze art show, also held in London in October, that there was a flight towards more traditional and less fragile types of works of art – paintings as opposed to delicate installations and as one dealer put it, an aversion to 'scenes of people f******'. But that's not enough to signal the end of the party.