A real alternative

In Shares Magazine, November 2013. Original article.

Screen Shot 2014-03-01 at 16.03.08A real alternative
Wine, stamps, gold bars and other real assets have historically kept their value well amidst economic turbulence and inflation. And they have never been easier for private investors to trade.

At first glance, it seems a Picasso would have been a better investment than the FTSE100 over the past decade. Art as an asset class grew by 183%, compared to a 55% rise in the market in the ten years to July 2013, according to the Knight Frank Luxury Investment Index. In fact, most so-called real assets such as wine, stamps, vintage cars, jewellery and physical gold, all beat the market in this period, providing a decent hedge against economic instability and inflation.

Once the purview of specialists only, alternative assets are becoming increasingly accessible to retail investors. Custom trading platforms are making the process more transparent and streamlined: GoldMadeSimple and BullionVault are online investment services where investors can buy and sell gold bars that never moves from a secure storage location as ownership changes. Liv-Ex and Wine Owners provide similar services for fine wine, while Stanley Gibbons enables investors to build and trade portfolios of stamps.

The passion investment
But just because stamps as an asset class grew by 255% in the past decade, that does not guarantee all stamp collectors saw a positive return. Real assets are high risk, with the lack of regulation, poor liquidity and high commissions. And then there’s the specialist knowledge: knowing the difference between a Bordeaux and a Shiraz is no longer just about complementing dinner, but knowing which will be the moneymaker in the cellar.

“It is not as simple as the FTSE100, where anyone can buy in and pay a moderate fee. Wine, stamps, and collectibles are investments of passion, so if you are not going to enjoy them, do not buy them,” says Andrew Shirley, head of rural research at Knight Frank, the property consultancy. Shirley compiles the Luxury Investment Index for the annual Wealth Report.

Motivations tend to be mixed, however: while coins and stamps come with the pleasure of ownership, they are also an investment. “There has been a lot of interest in some of these assets in recent years from emerging markets, in countries which have seen a lot of wealth creation. Asian investors have been spending a lot of money in the art world, and especially Hong Kong and Chinese investors have been buying a lot of expensive wine. It has all had an effect on pricing,” says Shirley.

A liquid trade
Most wine investors will at least start from a point of view of personal interest, says Nick Martin, founder and executive director of Wine Owners, the portfolio management and trading exchange. “The wine market is a steady, relatively old fashioned, market. It is full of people whose motivations are mixed between interest and investment. Perhaps three-quarters of them have a pure investment outlook.”

Established in 2011, Wine Owners aims to make it easier for private investors to trade wine by providing price charts and research, as well as the ability to trade online while the wine is safely stored in specialist warehouses. “This is something that has not really existed for private investors before,” says Martin, explaining how wine trading has traditionally been reserved for wealthy investors. Maybe they got around to looking at their portfolio once or twice a year, by making some calls to contacts to see which vintages were worth selling and keeping. “But now we have more information available, meaning it is not a major event to review the portfolio. This is bringing new liquidity to the market.”

The Wine Passport is Wine Owners’ push to improve transparency in this market, by attaching complete records of source, movement, inspections and other details relevant to each bottle. This is reassuring for an asset where one dodgy transport could see the product ruined by being left in the sun too long. “Top wines have a pretty long shelf life, and will keep from 20 to 70-plus years. But they are a living product and will hit a plateau of maturity,” says Martin. HRMC classifies wine as wasting chattel, meaning private investors are exempt from capital gains tax.

The value of wine as an asset rose by 182% over the past decade, according to Knight Frank, however Martin stresses that wine is a volatile asset: “It is a market prone to small but fairly significant bubbles.” Often performance is tied to economic events: the wine market dipped in 1997 after the Asian crisis, and again around 2000 during the dot-com bubble. Most recently, prices spiked due to demand from Asia: “A handful of top Bordeaux wines went from around £1800 a case to £15,000 in about 2.5 years. That came down again in 2011. Clearly that was a bubble, caused by a new and relatively immature market opening up.”

Rarity is king
Having gained 430% in value over the past decade, vintage cars owners were the winners in Knight Frank’s index. But more obscure assets can also be surprisingly profitable: for instance, the 40 most sought-after autographs have gained an average of 13.6% per year since 2000, according to the PFC40 Autograph Index from Paul Fraser Collectibles, the specialist trader of investment-grade collectibles including stamps, wine and coins.

“The traditional staples of stamps, coins, autographs, classic cars and art are always popular,” says Daniel Wade, news service editor at Paul Fraser Collectibles. “But it is important to remember it is only the rarest, most desirable collectible items that have true investment potential. These are the pieces that collectors fight over, pushing prices higher. It is far better to buy one stamp worth £10,000, than ten worth £1,000.”

With that in mind, Wade believes the market need not necessarily be all that risky. “If you are trying to get ahead of market trends, say by buying an emerging artist, then there is large risk attached. Yet the prices of many collectibles sectors are underpinned by a large and knowledgeable collector base. There are 50 million stamp collectors worldwide, preventing major fluctuations in price.”

Wade warns potential investors to watch out for fakes, and not to be impressed simply by certificates of authenticity. “Buy from a dealer who offers a lifetime money-back guarantee of authenticity. This will give the assurance that what you are buying is the genuine article.” And do not be afraid to ask lots of questions, concludes Wade; after all, wine buffs and stamp geeks love to talk about their favourite investments.

Golden attractions
As the world’s largest investment service for physical gold, BullionVault now services 50,000 people globally who own more than 32 tonnes of metal between them. Trading takes place 24 hours a day. “We plug you into the wholesale market. That means whole bars, so think ‘The Italian Job’, think ‘Goldfinger’,” says Adrian Ash, head of research at BullionVault.

Investors will unfortunately not be handling their bars like a Bond villain, as their metal is kept in specialist vaults in Zurich, London, New York, Toronto or Singapore. “The choice of location is important. If the economic situation deteriorates, or a government tries to bring down the shutters on capital flow, this is one way of keeping some of your wealth outside of that,” says Ash.

While the appeal of the yellow metal as a hedge against turmoil and inflation is well-documented, companies like BullionVault have made it much easier for private investors to tap into these benefits directly. “Gold is an incredibly deep, liquid market in a way that fine wine is not. Gold is gold, it is a chemical element that does not even rust. It requires very little care,” says Ash.

Investors who joined the party earlier this year, encouraged by a decade of price increases, will know there are price risks to this steady asset. However Ash believes physical gold is becoming increasingly natural for many investors to have as part of their portfolio: “People tend to buy gold for insurance.”

Traditionally, those hoarding gold bars may have been of the more anxious persuasion, with gold funds being the mainstream choice. “But we may be wrong to assume we are smarter and cleverer than our predecessors, or that the world is a safer and easier place where people do not need to resort to metal,” says Ash, pointing to the events of the past few years. “They call gold ‘the barbarous relic’ and that still applies, because the world can be a barbarous place. We have not refined our systems to perfection. People will turn to what is a very simple, very transparent investment.”

Yellow fever

Published in The Market, 2012.

Yellow fever
Gold is the ultimate rock in the storm for investors in times of crisis. Recent highs in the gold price has led to intensified speculation that we may be in a bubble, but at the same time, the case for gold remains as solid as ever. We take look at what drives the demand for the yellow stuff.

In times of economic turbulence there is usually one thing we can rely on: gold. When inflation takes a swing at the buying power of our hard-earned cash, and threatens the value of property and other investments, gold has proven highly resilient. And it is not a new phenomenon: during the reign of Babylonian king Nebuchadnezzar 2500 years ago, it is believed an ounce of gold would buy 350 loaves of bread – just as it does today.

The gold price has enjoyed an incredible bull run over the past decade, having seen a value increase of around 600%. Over the course of this year alone, the price has risen by 30%, and the slump experienced earlier this autumn has since been recovered, courtesy of the troubles in the eurozone. Recent economic events are a prime example of the kind of circumstance that fuels the gold price: uncertainty punishes stocks and currencies, so nervous investors run towards a safe haven. But now the big question is: can this price level be sustained?

The currency push
“A key driver for the rise in the gold price is the desire for people invested in currencies to diversify,” says Charlie Long, analyst at Singer Capital Markets. Currencies like the US dollar are traditionally seen as a safe pair of hands, but this is no longer such a clear-cut case as Western economies having a hard time. Consequently their currencies come under pressure, and investors start to look for alternatives. “In hedging your exposure to western paper currencies, gold is seen as a good bet. Bear in mind, gold has been the major currency throughout history, whilst an unbacked US dollar has only been around since 1971,” says Long.

The ongoing surge in the gold price has led to speculation that we could be in the middle of a price bubble, especially in light of the wobbles experienced in recent months. Still, there is no way to tell for sure where the price is headed; alongside talk of over-inflation we also see speculation of new record highs up ahead for gold. Consequently, each investor needs to consider both sides of the argument and use their best judgment.

“There are good arguments that gold will stay strong, or at least that it will not collapse,” says Long. “It seems to me the fundamental reasons for people buying gold will continue for at least the next couple of years.’

Gold under the mattress
The downside to investing in gold is that the asset class has no income, nor does it yield dividends. Another point to note is that while there are industrial uses for gold, demand is primarily driven by the financial markets. This is why gold is different from the other main metals, these being silver, platinum and palladium, where demand mainly comes from the industrial sector. Consequently, these metals have not enjoyed the same uptick as gold, as their price drivers are different.

As a gold investor, one option is to buy bars and stuff them under your mattress, but a better alternative for those keen to own the physical metal will probably be to buy a certificate for gold stored in a vault. Those wanting assurance they can get their hands on their gold in case of an economic meltdown should make sure to get an allocated account, as this would mean owning a specific pot of gold rather than an anonymous share of a general inventory.

A less radical approach is to buy a gold tracker, such as an exchange-traded fund (ETF). This will be designed to mimic the overall performance of gold for its investors. There are a number of gold ETFs to choose from, depending on whether an investor wants to track the commodity price, the futures price, or if you are bearish on gold, go short. A more risky approach is gold spreadbetting or contracts for difference (CDFs), or investors could buy into an investment trust specialising in the metal. Trusts and funds usually own shares in gold miners, which is another key approach to tapping in on the fortunes of the yellow stuff, but first a fair warning: gold mining is risky business.

Up from the ground
“One point most gold miners have been aware of for some time, but has somewhat been ignored by the commodity markets, is that the cost of mining an ounce of gold has been increasing at a similar rate to the growth of the gold price,” said Duncan Hughes, mining analyst at Ambrian Capital, in a report on the sector.

While the price of gold itself is largely driven by demand from the financial market, the value of shares in gold miners will be affected by a whole host of more down to earth concerns. This includes the cost of digging through less pure deposits, competition for workers, rising prices of associated costs such as fuel, plus the overhanging risk that mines come up short of their initial promises. All this means the value of gold shares have not enjoyed the same good fortune as the pure metal, but, says Hughes, if the gold commodity prices keep rising, the mining stocks should start to catch up.

As the fate of gold miners is tied to the performance of the overall market, there are however no guarantees: “If the global economy suffers a more prolonged recession, or if countries start defaulting on their debts, then gold equities will go down alongside other equities,” says Singer’s Long. “But if the gold price stays high, then gold producers will continue to generate huge amounts of cash. This will force analysts to upgrade forecasts and gold shares should rise. How many other sectors are seeing upgrades to forecasts?”