Thursday, November 02, 2006

Art, Gold, and the Dollar

Art, gold, and the dollar. What do these three items have in common? Well, I don't know that they have a lot in common so much as a common thread running through them.

In the following stories, we'll see how the "value", or purchasing power of the dollar can determine the ways in which people allocate their resources. And you don't have to stop at just trading your dollars (or euros, etc.) in for paintings and gold. Some form opinions on the underlying weakness or strength of a currency and use their view as a basis for a currency trade.

You'll see, in this post, a high profile example of how difficult it can be to time such a bet.

Before we begin, I want to give a quick nod to Richard Russell and his Dow Theory Letters report for the heads up on two of the following articles.

Let's start first with this headline-grabbing forecast of the upcoming New York auction season: "Billion-Dollar Record Likely at Art-Jammed Manhattan Auctions". According to writer Lindsay Pollock, auction estimates for the upcoming November art sales at Christie's and Sotheby's are projected to result in the biggest selling season in history. Many expensive items and higher profile works are now coming onto the market:

``People think it's a good time to sell,'' said New York art dealer David Nash. ``The prices things have sold for over the past three to four sale seasons are very encouraging for people to put their works on the market.''

But will the buying interest match the sellers' desire to unload? So far, everyone seems to believe that the newly expanded pool of deep-pocketed buyers will turn up with their checkbooks in tow.

The auction houses also say that the buying pool has grown. Russian billionaires, Asian collectors and a recent influx of hedge-fund managers are all vying with traditional American and European collectors.

``Our bidder lists are more diverse than ever before,'' said David Norman, head of Sotheby's impressionist and modern art department. ``You almost wonder what currencies to put on the board,'' he said, referring to the large electronic displays in sale rooms that convert bid prices into various denominations.

There is a flood of new money circulating across the globe, and the rich and wary are looking to transfer some of these funds into tangible stores of value (while at the same time, exhibiting some of their newly gained status). For more on this trend, see "Tangible Investments".

Now, we also have another time-honored store of wealth: gold.

Richard Russell has recommend that we read John Hathaway's excellent article on the subject, entitled, "Trivial Pursuit". I'm reading this now, and it seems that there is a very insightful analysis regarding gold's correlation to the commodities as a whole. Quote:

Until gold broke above the 350 Euros/oz barrier that had contained it for four years, conventional wisdom held that the currency was a superior way to hedge dollar weakness because it had both yield and liquidity in its favor. In our March, 2005 website article, "Euro Trash," we noted that the relaxation of the stability pact which was supposed to underpin the integrity of the currency was good news for gold. Within two months, gold broke above the supposedly impenetrable threshold, and signaled a new advance of nearly a year in which gold attained new highs against all currencies. Gold's current identity crisis will be resolved when it breaks to new highs against a basket of commodities.

And since we're getting long on type, I'll quickly mention the following article, "Dollar Roulette". A very interesting piece on the currency bets made by Robert Rubin and Warren Buffett.

Why didn't their bets work out? Maybe it was timing, maybe they were just wrong. Who knows, but read it for yourself. It doesn't hurt to learn from their experience, right?