The market for modern art has been heating up rapidly over the last 20 years. It started with enormously wealthy collectors – individuals and companies – switching their attention from Old Masters to modern art. At first, they bought established figures from the 20th century like Jackson Pollock, Andy Warhol and Mark Rothko. Then they started paying big money for new works by up-and-coming artists. In the last few years, prices have gone stratospheric.

The buyers are international and the hub of the action is New York. Fancy a shopping trip? Last May, during a week of auctions in the city, you could have seen a Jeff Koons steel sculpture of a train full of bottles of bourbon sell for $5.5 million. You could have joined the bidding for a medicine cabinet by Damien Hirst ($1.1 million), and sympathised when artist Brice Marden failed to buy back his own painting, dating from the 1960s and of great sentimental value to him – he just couldn't afford to match the $1.3 million paid by a top gallery. In total, more than $186 million changed hands that week, and many works went for two, three, four times their expected selling price.

It looks like a gold rush, and speculators have duly moved in. Day traders now buy and sell art works on a short-term basis for their clients, making quick profits as prices rise. Meanwhile, long-term collectors based in America get generous tax breaks on any art they loan to public museums or galleries. With the tax deduction being calculated not on the original price paid, but on the value of the work at the time of the loan, collectors can earn back their outlay within a few years. If they loan the work for, say, six months of each year, that's an ongoing, appreciating tax allowance, quite apart from the growing value of the art itself. Oh, and while the work is on loan, the museum pays for the insurance and maintenance. If you're a billionaire, hell, even an ordinary multi-millionaire, you can see it makes sense.

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