Since the Financial Crisis, there has been consistent talk of why the art market has managed to sustain relative buoyancy compared to previous crises. One reason is perhaps that art is beginning to show increasing characteristics of fungibles such as commodities.

What is a commodity exactly? According to the Oxford Dictionary, it is defined as “a raw material or primary agricultural product that can be bought and sold, such as copper or coffee; a useful or valuable thing.” Clearly art is not a raw material (Damien Hirst exhibitions excluded), nor is it an agricultural product. Art is a useful or valuable thing, though. So according to the strictest definition we can simply say art is a commodity through its value. However, the more commonly understood economic definition of a commodity is something along the lines of a “good that is used as an input to a manufacturing process; or a good that is consumed in itself (agricultural).” The most defining quality of a “commodity” in the economic sense is its fungibility, its ability to be substituted by a similar unit, with little or no difference. For example, one ounce of gold is always one ounce of gold; you can swap one for another. It doesn’t matter who produces it or where it is from. Clearly art is not a commodity by this definition. Similarly, diamonds are also not a commodity, because their value depends on the cut, the color, etc. Another type of “product” in this sense is branded goods — a Chanel is not Zara is not Levi’s.(1) The fungibility and lack of differentiation of commodities are what allows them to be traded. Shares are similar (in that one share of Company X is generally the same as another share of the same Company X). Art is not like that: one Picasso is not the same as another. “Picasso” prices (and quality) can vary tremendously. Yet another could be property — location, quality, size, etc (art would accord with this description very well).

Nevertheless, art is an asset that does show some similarities with commodities or a case of “commoditization” — a tendency towards treating art as a commodity. Hence, one might note how art is a finite resource (Picasso is dead, clearly there will never be any more Picasso’s); it is non-renewable (although this is a bit more woolly when considering still breathing artists); it has a carrying cost in that valuable works will tend to be stored or exhibited in places with adequate security and display conditions; and by and large it’s value (as a class) has been appreciating. And to a certain extent it can be a described as fungible, especially given that investors often don’t really care which “Zeng Fanzhi” or which “Damien Hirst” they buy. Looked at with broad strokes we can again say art is a special type of commodity or perhaps a “commodity-hybrid.”

As with everything, there are differences. There is no derivative market (although this is not an impediment to being a commodity — iron ore has only recently had a derivative market created and no one would doubt it is a commodity); there is no end user or process that will turn the art into something else that may be used or consumed; and art is not dug up, grown or harvested (though some galleries might beg to differ). Also while commodities are finite in the same way that land is finite, vast quantities remain. The number of Picassos can be enumerated, on the other hand. Again, property is the more natural analogy here, esp. property in a historic district with strict heritage controls).

Art collectors, however, are end “appreciators” who may perform the same function as an end user with certain kinds of commodities, for example agricultural ones. Care, skill and process are applied to inputs to produce an output that is then consumed / used. Relative scarcity will drive up the price of wheat or corn just as much as it drives up the price of a Monet. While the Monet is not consumed, nor can it be renewed, it has been created via the same process of utilizing inputs of paints and brushes, applying skill and process (painting), and creating an end product that is used or appreciated in much the same way a farmer will take seed and fertilizer, apply a process (called farming), to create an output that is used or consumed. But of course, this sort of definition ends up being circular, as a process of inputs, technique, and creating an end product can cover all kinds of production! And in which case let’s just call it a “product.”

Furthermore, art does not usually exhibit backwardation typical of commodities — whereby future prices are lower than current prices. This is an attribute specific to commodities and is caused by the value a consumer or owner has in having the commodity now rather than in the future (are new collectors all commodity traders?). For example, if you are a steel mill owner, iron ore today is worth more to you than iron ore possibly in the future, because without it today you will have to shut down, incurring costs. In the future with a plentiful supply you will be able to easily acquire enough to continue running your mill. The price of art can, however, go down. In such cases one would surmise that the owner would simply not sell if the reserve price were not reached. Any astute investor will tell you that the reserve price will, at the very least, be the price the collector paid. Prices, therefore, are bound to be in contango. But that is not always the case. There is no way to sell or buy a contract forward (even though the pricing would be intuitively the same).

It seems that the real value of art comes in its scarcity, although this in itself is no guarantee of value. I am still trying to sell the one and only painting I’ve ever done and so far not even my mother will buy it. Perhaps scarcity is not enough to determine value. Perhaps it is the various “fashions” of art that determine value; who is popular today and who is not (Bonnard and Modigliani are not as popular with collectors today as they once were). Also, some categories of art are now so rare that that their tradability has declined — art of the past 150 years dominates auction record records partly because the best of older art is locked-up in museums and will probably never come on the market again. My personal conjecture is that Chinese and Indian art will increase in value (be in contango) as these parts of the world demonstrate increasing affluence and a greater degree of influence on the world at large.

The case seems clear; art is not a commodity. It is simply a store of value. A store of value –remind you of anything? Gold. Gold is a store of value and has been for decades. At times of great economic crisis, traders, investors and laymen move their assets into gold. When inflation is seen lurking around the corner, casting its dark shadow over the otherwise sunny Wall Street types, gold increases in value. When times are booming and greater returns can be found elsewhere, gold will tend to decrease in value (while this is a rather simplistic and historical viewpoint, a little out of touch with the increased purchases by the Indian market seen in the last few years driving the prices up, but is a fair reflection of gold trading in the last decade). Something that is unlikely to lose its value regardless of economic conditions is an asset with similar characteristics to gold. Art could conceivably fall into this category.

Gold, while scarce and non-renewable, is renewable when compared with art — more gold can be “dug out of the ground,” more art can be “produced.” After all, unlike commodities, gold and art as investments have very little reference to their usage value in making products. So perhaps to better understand and quantify the price paid for various works of art we should look at the price of gold and take that as our comparison to the world of commodities. Or is it all speculation?