Classic Cars and Art Investment

Written By Geoffrey Pike

Posted October 16, 2015

We all have our interests and hobbies. Some people like certain sports, some like to cook, and some like to collect things.

If you ever find someone who is really frugal and think he must have a lot of saved money, just dig deeper, and you will likely find some kind of hobby that he enjoys and is willing to spend money on.

Different things make different people tick.

Take classic cars as an example. There are a few people out there who would just keep collecting cars if they had the money to do so. You will occasionally see a rich celebrity with a dozen classic cars parked in his massive garage.

I would have to have tens of millions of dollars to own an expensive classic car. I enjoy the sight of a nice car, but it isn’t what makes me tick.

Other people like to collect expensive art. Owners of vast amounts of art take pride in their collections. It is a thing of beauty to them.

In this sense, car collectors and art collectors have something in common. It is a source of enjoyment for rich people. You could say the same thing about stamp collectors or baseball collectors, though these people aren’t necessarily rich.

Classic cars and expensive art have something else in common: They are sometimes bought for a secondary reason. In some cases, it may actually be the primary motivation of the buyer.

Classic cars and art can act as a store of wealth. They can both be considered investments, even if they are unconventional. They can act as investments to make profits, or they can act as a hedge against money depreciation.

A recent article on Quartz claims that art is the new reserve currency for the world’s rich. The volume and value of the art market has grown substantially over the past decade and is almost seemingly being used as a currency.

Bubbles and Manias

In today’s financial markets, it is difficult to find a simple investment that is relatively safe, while also offering decent potential returns.

If you have cash in the bank, then it is earning virtually no interest. If you account for price inflation, the real rate of return is negative.

The same goes for bonds. The only way you can make money on bonds is if interest rates go even lower than they are now.

The stock market has done well since 2009, but this was after plummeting just before that. Stocks can offer good potential returns, but it is not exactly a safe place to go. One crash, and you can lose half of your money within days.

Gold has done well since the year 2000, especially if you bought it at the lows. But it has been a terrible performer over the last few years.

Some people have turned to real estate and have done reasonably well if they bought near the bottom. Real estate is obviously expensive to get into and is not liquid. It has its own set of risks as well.

This has led some people to look at collectibles as a form of investment. If you love classic cars, you can invest your money there. You also get to enjoy the beauty of your purchase, unlike a stock or bond certificate, so you can get a two-for-one.

You could say this about any collectible item. This could include art, baseball cards, stamps, collector coins, Lego sets, antique furniture, and so on.

The problem is that these are not safe investments, either. Art and classic cars have generally gone up in price over the last several years and have made owners happy. But the bigger question is: will it last?

Some owners of art and classic cars may just hold onto their possessions forever. If that is the case, it isn’t really an investment. I suppose it can serve as a last resort to pay their bills if it ever came to that. But if it ever came to that, their possessions probably wouldn’t be worth that much.

The problem is that some people are buying collectibles primarily to make money. They are a speculation. They are just hoping to find another buyer down the road who will pay more than what they paid. This is a classic bubble if too many people are buying into something in an attempt to sell it to one more sucker down the road.

Bubbles and manias are not a new phenomenon to today’s world. There was a tulip bulb mania in 1637. All bubbles and manias eventually come to a painful end.

The Federal Reserve’s Giant Auction

In today’s world of central banking, it is monetary inflation that is the primary driver of these bubbles and manias. It drives people to do crazy things. They take on massive debt in many cases, and they buy things that — under normal conditions — wouldn’t make sense to buy.

It is no surprise that these bubbles and manias occur. As long as central banking and fiat currencies exist, then unsustainable bubbles will exist alongside them.

Imagine you go to an auction where people are bidding on items to buy. Everyone in the room has an average of $100 to spend at the auction.

What would happen if everyone’s money doubled and they had to spend it at the auction? Now there is an average of $200 per person to spend. What do you think will happen to the prices of the items up for bid? You would expect them to roughly double as compared to before. The number of items up for sale hasn’t changed, but the amount of money being used to bid on them has.

This is what the Fed does in our economy — similar to a great big auction.

Some people assume inflating the money supply isn’t that big of a deal because all prices will rise. But this isn’t necessarily true, and the prices do not rise uniformly.

Federal Reserve inflation is harmful anyway because it misallocates resources. It directs capital towards things that are not necessarily the highest priority for consumers. It also distorts savings and investment.

But even with the question of prices, newly created money does not flow evenly through the economy. It gets injected into certain sectors early. Unfortunately, it is usually wages that lag behind. It is a redistribution of wealth that benefits the people who receive the new money early on in the process.

The new money gets injected into certain sectors, which are really your bubbles and manias. This can be stocks, gold, bonds, housing, classic cars, art, or virtually anything. Without the easy money and credit and the artificially low interest rates, you simply wouldn’t have the money to blow up these unsustainable bubbles. You also wouldn’t see people taking as big of risks in search for a good yield.

Eating Money

I have heard critics of gold say that gold is not a good hedge against disaster because you can’t eat it. While this is true, you can’t eat your paper currency either. And you certainly can’t eat your digital currency in your bank account.

Whether we like it or not, the U.S. dollar serves as money in the United States (and in other places, too). You can’t walk into Wal-Mart and buy items with your gold coins, unless you get a really smart cashier who is willing to take them and pay your amount due out of their own pocket.

You also can’t walk into Wal-Mart and pay with a classic car or a nice piece of art. And just like gold and dollar bills, you can’t eat your car or your painting.

Still, it is understandable why people buy into collectibles and hard assets. You can’t make more of them on a printing press or a computer screen. This goes for cars, art, and gold coins. You can’t say the same thing for dollar bills.

If there is another downturn in the economy, collectors should beware, especially if they are doubling as investors. Bubbles eventually pop.

If something in particular makes you tick, then go for it if you can afford it. But you may be getting into a risky game if you are looking to sell it for big bucks down the road.

While Picasso paintings are unique, only gold and silver have a long history of being used as a store of value. There are no guarantees with anything, but following history is usually a smart choice.

Until next time,

Geoffrey Pike for Wealth Daily

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