All that glitters…

So, we’ve got this gold thing happening again. You can always rely on a gold bug to trumpet the precious metal’s attractions when it seems to be hitting the fan in other asset classes.

Financial pages are awash with headlines about gold being the best performing asset year to date. But what, if any, are the implications for investments in the fine wine market? After all, there does seem to be some correlation, as you can see from this graph:

At Amphora Portfolio Management we are often asked if fine wine prices behave the same as any other commodity prices, so just for the record: fine wine is NOT a commodity.

The definition of a commodity revolves around fungibility; in other words, how exchangeable are two separate ounces of, for example, gold, and the answer is, perfectly exchangeable. They are, to all intents and purposes, exactly the same thing.

All commodities respond to the inexorable laws of supply and demand. In the case of gold a raft of other excuses are wheeled out to justify a buy or sell recommendation. Gold is an inflation hedge, a “store of value”, a component of jewellery manufacture. It seems to us however that people invest in gold as a hedge against panic in other asset classes rather than as a hedge against inflation. That is certainly the evidence of the last couple of months.

So what might make someone invest in fine wine, at the same time as they are investing in gold?

We believe that there are (at least) two discrete things going on here. Firstly, certain of the key drivers of price were matched over the time frame illustrated above. We know that the two major developing economies of China and India import huge quantities of gold both for jewellery manufacture and as a store of wealth. As the economies (especially China) were growing fast, appetite for gold was rising.

At the same time, China embarked on its love affair with Bordeaux, driving prices to unprecedented levels. Principally because import duties of fine wine into India are 160% the same degree of acquisition has not been matched there, but the interest from China was more than enough to see prices skyrocket.

What is so interesting about this is that it all happened at a time of economic and financial paralysis in the West, and the subsequent correction coincided with stability returning to those Western economies.

This brings us to the second point: there is a total divergence in causality with regard to the decline in prices of gold and fine wine. The correction in the fine wine market resulted from an unwinding of the speculative hype that built up in the years to mid 2011. This was stimulated by concerns over the Euro, and the health of the Chinese economy, in addition to the perceived unsustainability of prices at 2011 levels.

The gold price decline, by contrast, resulted precisely from the fact that Western economies and financial systems stepped back from the abyss. The ‘safe haven’ was no longer required. Gold was sold off and bets were placed on ‘riskier’ assets like equities.

This would suggest that we should be careful about placing too much stress on any perceived correlation between gold and fine wine prices. As mentioned above, we do not regard fine wine as a commodity anyway. There is obviously no homogeneous fine wine price. The fine wine market is much more like a mini stock market, with different wines and vintages moving in different directions at the same time.

Any imagined correlation in price movements over the last five years, for example, would take absolutely no account of this:

With gold the investment decision is somewhat more binary. Do I buy it, or do I not? There is no “how should I manage my exposure to the gold market” question. By contrast, that should be at the very heart of the fine wine investor’s decision-making, and, we would naturally argue, that is one of the things which makes investing in fine wine so much more pleasurable a pastime.

There are countless other differences, of course, the most important being one of scale. A minute’s turnover in the bullion market would keep the Liv-ex pedaling furiously for a year. Key wealth preservation questions come into play in the gold market, against which investments in fine wine are more likely to be classed as a hobby.

Meanwhile in Monday’s Indian budget, finance minister Jaitley has reintroduced a sales tax on gold jewellery and increased import duties, in an effort to curb imports and mobilise local savings lodged as gold bullion. Whoever you listen to this will either reduce demand owing to the higher taxes, or raise it as expectations were for a cut in taxes, so there is pent up demand behind the market which will need to be satisfied.

We can only imagine the impact on the fine wine market when the Indian 160% import duty is reduced to a more reasonable level.
Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at APM. www.apmwineinvestment.co.uk