Newsletter #33, April 2010

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This is Part 5 of a seven-part series on the vintage guitar market, written in 1991. Prices and other references specific to that time period have not been changed. Please feel free to email me with any comments.

George Gruhn

To view the rest of the series...
Part 1: The utility market
Part 2: How instruments are priced
Part 3: The role of the collector
Part 4: Fads (including Stratmania)
Part 6: The vintage dealer as trendspotter
Part 7: Instrument sales and musical styles

The Vintage Instrument Market, Part 5: Market dynamics

The vintage market is not only relatively young, but relatively small compared to the gold, silver, diamond, stamp, coin, art or antique markets. Consequently, the vintage market can be destabilized by relatively small amounts of money, amounts that wouldn't cause a ripple in the gold or silver markets. Just as one ounce of boiling water added to a barrel of tepid water will not significantly alter the temperature of the barrel while the same ounce would dramatically raise the temperature of a teacup of tepid water, the vintage market can be destabilized by a relatively small number of buyers.

Paradoxically, the guitar market has historically been less volatile than most of these other, larger markets. If a guitar doubles in value within a year, it is considered a phenomenal increase, and if it falls as much as 25 percent in a year, that is considered a drastic loss of value. There are obviously forces at work that can help offset the effect of that ounce of boiling water and help stabilize the market. Those forces are the different kinds of values instruments possess that some of the other examples don't possess-specifically, intrinsic, utility and emotional values.

Stamps and base metal coins, for example, have little or no intrinsic value. Few cost more than a few cents to produce. Gold and silver have more intrinsic value, since production costs include the expenses of prospecting, mining, etc. Nevertheless, that value is extremely low compared to market value. When the price of gold was fixed at $35 an ounce, people still produced gold at a profit. When the market value of gold passed $800 an ounce, there was plenty of room for it to come down and still retain a value far higher than its intrinsic value.

A block of gold or silver has limited utility value. It could be used as a doorstop or paperweight but it doesn't have much utility value just as an ingot. In the vintage instrument market, the utility value is, for many models, close to the intrinsic value which is often close to the market value.

People can be passionately involved with a guitar, where the owner feels like the item has soul, as opposed to gold silver, where investment often is done on paper, where ingots are not ever in their physical possession. They have no emotional attachment. If they perceive the market being down, they just get rid of it.

Consequently we don't see guitars lose 25 percent of their value in a short time, like the gold, silver or commodities market.

Foreign buyers are currently functioning as that ounce of boiling water. Contrary to some people's perception, the vintage market is an international market, like that for gold or silver. No one is so naive as to think the price of gold or silver is determined in the United States; it's determined on a daily basis by worldwide bidding. Increasingly, the guitar market is becoming that way. No longer is the price of vintage American-made guitars determined in the United States, any more than the prices of fine Cremona violins are determined in Italy anymore.

Foreign buyers have been a significant factor since the early '70s. In the late '70s, the dollar was low, and foreign demand for American instruments was high. During the early '80s the dollar rose rapidly, resulting in higher prices for foreign buyers. Keep in mind that the market is affected either way. When foreign demand is high, prices rise. When foreign demand is reduced, overall demand is reduced, and during the early '80s, this absence of foreign demand caused a slowdown in sales, falling prices on some models and stagnation of values for many others.

There is also a psychological factor involved in currency fluctuations that complicates the issue. There seems to be a critical point, and if the dollar falls below that point, it's as if a big "buy" signal goes out to the market. Likewise, if the dollar rises beyond a certain point, a big "cease" signal goes out. The critical points differ from country to country and from year to year, depending on the economic changes in the foreign buyer's home country. The crazy thing is, the decision to buy or not buy seems to based not on price but on the relative currency values. When the dollar is low enough, they buy. Dealers may raise prices to compensate for the lower dollar. They may over-compensate for the low dollar to the point that the foreign buyer actually pays more than he would have when the dollar was high (within limits, of course). As long as the dollar is below the critical point, the buying continues. Needless to say, dealers here can make what may seem like an unscrupulous profit at those times.

Conversely, when the dollar goes too high, and the cease signal goes out, it seems a foreign buyer will not buy an instrument at any price, no matter how low (again, within limits).

The dollar peaked by early '85 and has since fallen very sharply. For many Japanese and European buyers, who were effectively frozen out of the market while the dollar was high, American products are now on a half-price sale. A D'Angelico, for example, that was $5,000 just three years ago may be $10,000 today, but the price has increased by 100 percent only if you're spending dollars. If you're spending German deutschemarks the price has only gone up 17 percent, and if you're spending Japanese yen the price has only gone up 8 percent.

Foreign buyers are now back in force with at least five years of pent-up demand to release from the period when the dollar was high. Their presence has increased the total number of buyers in the market as well as the total amount of currency competing to buy the relatively fixed amount of products. Obviously, the current market is unstable, and prices are rising.

There is some resentment among American buyers, and there is more to their complaint than rising prices. When foreigners buy American instruments, it's not the same as when they buy real estate. When they buy land, they end up hiring Americans and using American raw materials. They don't send all the profits home, because the dollar is devalued, and if the dollar rises against their currency, that real estate just might become American-owned again.

With instruments, unlike real estate, a foreign buyer can pack up his property and take it home. He doesn't take the instrument apart or misuse or abuse it, but many American collectors and musicians still don't like it because as far as they're concerned he's taking an instrument out of their hands. There is a hidden cost to the American dealer, too, that may offset the nice price he gets on a foreign sale. When I as a dealer sell an instrument in the states, it wouldn't be unusual for me to own the instrument five or six times through the years and make a profit on it each time it passes through my hands. If I sell it overseas, it might end up back here someday, but it is just as likely to stay in a foreign market.

Contrary to the complaints of many musicians, foreign buyers do not necessarily take instruments out of circulation, they only take them out of U.S. circulation. There is a strong utility market as well as a collector's market overseas, and an instrument bought for utility is still in circulation - international circulation. Sometime within the next few years, the market should reach a balance point of international distribution at which time instruments may start flowing back to the United States (but never in the volume in which they flowed out). In the long run this will change the approach of American vintage dealers. While many enjoy an international sales clientele now, they may find in the future that they must look to the international market for their supply as well as their demand.

The effect of today's foreign buyers is not without precedent. In the early '70s, it was the folk-rock musicians, under the influence of Crosby, Stills, Nash and Young, who had a similar effect. Prior to that, in the late '60s, the electric market and acoustic market were separate entities, and both were going up at a good rate. Then suddenly, with folk rock, a bunch of people who previously had no interest in acoustic instruments, but who had a lot of money, suddenly entered the acoustic market, outbidding, out-competing and pushing out of the market many American buyers who had up until then formed the basis of the market. Prices did skyrocket, maybe 30% a year, but by '75 or '76 folk rock had ended and a large percentage of these people pulled out of the market en masse. They left a void that caused acoustic prices to stagnate. It wasn't until '84 or '85 that acoustics started appreciating again.

People tend to be imprinted musically, as explained to me by Horace Ward, a 70-year-old plectrum banjo player. "We play the music and the instruments that were popular when we were of dating age," he said. Consequently, the vintage dealer can always expect (but not count on) a sort of delayed reaction, where today's music will likely be the driving force of the vintage business 20 years from now.

Today the largest segment of the vintage market is the post-war baby boom generation. Baby boomers were imprinted during a period when music was a strong social force and vintage instruments were part of that music. Music is still a strong social force to them and they still like the same kind of music. The only difference is that now they're more settled, with more leisure time, more hobbies and more money. Many of those amateur guitarists who gave music up when they started careers and families are now taking it up again. They're buying vintage guitars and all the other things they wished they had the first time around, as evidenced by the current demand for long-neck Pete Seeger style banjos, which a few years ago I couldn't give away.

The baby boomers are effecting more than the vintage market. Manufacturers of new instruments are reporting that for the first time in their history, the guitar market is not strictly a youth market. A major part of their acoustic market, especially for top of the line models, is made up of middle-aged buyers.

The imprinting phenomenon can be seen in the membership of the Fretted Instrument Guild of America. FIGA used to be a mandolin orchestra group, playing music that was popular in the period from 1905-21. Then, about 15 years ago, the focus of the group turned to tenor and plectrum banjo music of the 1922-28 period. The reason for the change is clear. The earlier members played the music they were imprinted with, and as they passed on they were replaced by younger members who had been imprinted with the music of a later period. (FIGA may well be doomed, because the instrument of the next period is the archtop acoustic guitar of the '30s, which is not so well suited for guitar-ensemble playing.)

Although I expect the baby boomers to be a major segment of the vintage market for as long as they live, I have no doubt that buyer profiles will continue to change as the music of the day changes. Many buyers who started out in rock and roll or other electric music come from a background in which Gibson or Fender are more respected names than Martin. For these buyers a Gibson Hummingbird, Dove or Everly Brothers model may have more prestige than a Martin herringbone D-28. Buyers with a blues background may prefer an old Gibson J-200 to a Martin dreadnought. To today's 20-year-old guitar buyer, an Ovation guitar with a built-in pickup and a fiberglass back may be just as traditional as a Martin is to a 40-year-old. While it's difficult for a veteran in the vintage business to imagine an Ovation or other modern guitar attaining "vintage" status 25 or 30 years from now, it would have been difficult 25 or 30 years to imagine that there would ever be a collector's market for a production-line solidbody electric called a Stratocaster.

Of all the factors that influence the market, the least influential but most-maligned is the dealer himself. At the Dallas guitar show in March of 1988 most of the sales movement appeared to be between dealers. Most of the people walking around at the show were dealers-the crowd was not by any means a cross section of the vintage market-but many of these "dealers" are really collectors who wheel and deal guitars to support their hobby. Many don't have an actual dealer businesses.

Some guitars at the Dallas show probably went through three or four dealers, but the reason for the buying and selling was not to artificially raise prices. Dealers buy an instrument because they think they can find a buyer who will pay more than they did for it. They're not going to pay $500 for a guitar unless they think there are buyers for that guitar at a higher price. That is not manipulating the market. That's basic business practice-in any business.

I don't believe there has been any conspiracy among dealers to raise prices. I don't think most vintage dealers like or trust each other enough to enter into a consipiracy. I know from experience that one dealer alone can not manipulate the market. When I priced something too high, the public let me know with deafening silence. On the other side of the issue, there have been numerous occassions when I stated that certain items - particularly Strats - were overpriced and that it was a stupid fad that would crash. I said I wouldn't participate in this Strat thing, and I missed out for a long time. I sold Strats for what I thought was a fair price and then watched other dealers make the killings. They sold those Strats for as much as they could get and buyers seemed eager to participate.

Granted, there are in this business dealers with poor ethical standards, but that is not unique to the guitar business. Nor do these dealers control either the market or prices. As in any open market, buyers control prices by either paying or refusing to pay what dealers ask.

That is not to say that one person can not wreak havoc on the vintage instrument market, but that one person is likely to be a buyer - a very rich one - rather than a dealer. There is not enough money to be made from dealing vintage instruments for any dealer to take over the market. It would be far more likely for a collector or small group of collectors to corner the market for a certain type of instrument. The total number of instruments in circulation of certain rare models, such as pre-war Martin D-45s, Gibson Lloyd Loar F-5 mandolins, Gibson All American or five-string Granada Mastertone banjos, or Fender Broadcasters, is so small that the sale of a very small number of instruments-as few as half a dozen-could greatly influence the market. Whereas you could go to 47th Street in New York and spend $1 million or even $10 million on diamonds and not cause an eye to bat in the diamond market, an instrument collector with a million dollars could easily corner the market on a rare and valuable model.

That market gets smaller and smaller as prices go higher. While there are millions of people worldwide in the market for a $500 guitar, I can often count on my fingers the number of potential buyers for a $10,000 instrument. The fact remains that the particular models that bring prices in excess of $10,000 instruments are so rare that demand still exceeds supply.

Certain instruments, like certain stocks, have prompted many people to say, "If only I'd invested $10,000 in that, back in 1980." On the surface the vintage market does appear to be much like the stock market and maybe even more appealing to an investor. Not all instruments have risen and fallen like the Strat; a few have risen dramatically and stayed high. The overall vintage market has shown some nice rises - 15-20 percent per year from 1964-70, for example - and although it has stagnated some years, it has never had a unilateral crash like the stock market has. Instruments that suddenly shoot up in value, like their stock market counterparts, are risky, but the investor who knows when to get out of a bull market (or a Stratmania) can reap considerable profits. And unlike a stock portfolio, an instrument collection can provide pleasure and, if you play well enough, extra added income while it's appreciating in value.

In theory, as long as the vintage market rises faster than interest rates, instruments would be good investments, and in fact the vintage market does rise whenever interest rates are low. However, there is more to it than that-specifically, more cost involved in collecting instruments than buying stocks. The instrument collector must store, maintain and insure his collection. And unless he is a veteran collector with the means to sell his instruments directly, he must sell through a dealer, either by selling outright or consignment. Either way, the dealer's percentage is going to be much higher than a stockbroker's percentage. Consequently, for an investor to make a profit in instruments, interest rates must stay low, and the market for his particular instruments must rise considerably.

Prices will probably continue to rise in the vintage market if for no other reason because there will be more collectors in the market through the next few years. Recent musical trends among those who play guitars, mandolins and banjos are toward more sophisticated music, which appeals to a more sophisticated listening audience. To the vintage dealer, the term "more sophisticated" will mean more educated and more money. If we see more people of any type-especially the more sophisticated type-in the vintage market, we will see prices escalating.

Part 1: The utility market
Part 2: How instruments are priced
Part 3: The role of the collector
Part 4: Fads (including Stratmania)
Part 6: The vintage dealer as trendspotter
Part 7: Instrument sales and musical styles