Gold Diverging From Fine Wine as Bullion Investors Lose Faith

May 29, 2013 at 07:09


Gold and wine prices that tracked each other in the past decade amid demand for alternative assets are now diverging after bullion slumped into a bear market as some investors lost faith in the metal as a store of value.

The Liv-ex Fine Wine 100 Index tripled in the past 10 years and gold advanced fourfold. The wine gauge rose 5.9 percent this year as bullion slid 17 percent. Credit Suisse Group AG said May 16 that the metal may drop to $1,100 an ounce in a year, or 21 percent less than now. The Wine Investment Fund, which manages about $50 million of assets, expects the Liv-ex gauge to rise by about another 7.6 percent by the end of December.

Demand for gold, wine and other alternative assets gained in the past several years as equities retreated and bond yields tumbled to record lows as central banks printed money on an unprecedented scale. Gold held through exchange-traded products exceeded all but two of the world’s central-bank reserves. Holdings fell 18 percent this year as equities rallied on mounting confidence that economic growth is strengthening.

“They’re both physical assets that have their own intrinsic value,” said Chris Smith, a London-based investment manager at The Wine Investment Fund, founded in 2003, the same year as gold ETPs. “Wine becomes attractive when people are a bit uncertain about the economic environment. Now that governments are pumping money into the economy all around the world, that should in theory lead to inflation at some point.”

Gold fell to $1,387.20 in London since the start of January after appreciating for 12 years, the longest run in at least nine decades. It slid as much as 31 percent from its September 2011 record through April 16, when it set a two-year low of $1,321.95. The Liv-ex gauge, calculated monthly, plunged 29 percent from 2011 to a 2 1/2-year low in November. It priced at 276.17 in April and may reach about 297 by year-end, Smith said.

The performance of both assets compares with a drop of 2.6 percent since the start of January for the Standard & Poor’s GSCI gauge of 24 commodities and a 10 percent gain in the MSCI All-Country World Index of equities. Treasuries lost 1.1 percent, a Bank of America Corp. index shows.

The Liv-ex measure represents 100 of the most sought-after fine wines that have a strong secondary market, according to the website of the London-based Liv-ex. It says the global trade in fine wine, 10 percent of it transacted through auctions, is valued at about $4 billion annually. An average $34.7 billion of gold was traded daily through the London market in March, according to the London Bullion Market Association.

Investors own $96 billion of gold through physically-backed ETPs. The holdings reached 2,632.5 metric tons on Dec. 20, and this year’s sales of 477.7 tons now exceed additions in the previous two years, data. The metal will trade below $1,000 in five years, Ric Deverell, head of commodities research at Credit Suisse, said May 16.

Not everyone sees further gains for fine wine. Prices for Bordeaux up to 10 years old should retreat, Yannick Naud, a fund manager at Glendevon King Ltd., said May 22 in a Bloomberg Television interview. The Liv-ex Fine Wine 100 Index fell almost 15 percent in 2011 and 8.9 percent last year before rallying since the start of January.

“There was a very rapid rise and then a correction,” said Smith of The Wine Investment Fund. “There came a point when people thought that it was just too high, and if you like, there was a bit of a bubble and it burst. Now, the correction has probably been overdone.”