My finances, my projects, my life
August 21, 2019

Opportunities and pitfalls in investing in precious objects

  Compiled by myLIFE team myWEALTH March 23, 2018 359

Actress Elizabeth Taylor set the benchmark for investing in collectables with her appetite for jewels. In 2011, ‘The Collection of Elizabeth Taylor’ realised a combined total of $156,756,576 at Christie’s New York. Of the 80 jewels under auction, 24 fetched more than $1 million and six in excess of $5 million. Taylor truly liked her wealth where she could see it. What about you? Should you invest in precious objects?

At a time when stock markets worldwide are setting all-time highs, and the latest investment vogue is for internet-only crypto-currencies, it is tempting to fall back on the security of something tangible – an investment that can be worn, drunk, or hung on a wall. While few will reach Taylor’s giddy heights, ‘precious’ assets – fine wine, art, gold or antiques – have a place in the portfolios of many investors.

“I never worry about diets. The only carrots that interest me are the number you get in a diamond.” Mae West

These assets are far from homogenous – each has different markets, and its own investment characteristics. Gold, for example, is a popular choice when markets or economies look vulnerable.

During the financial crisis, bullion dealers reported a global surge in demand for gold coins and small bars as investors feared the institutions that had previously housed their wealth would collapse, taking their money with them. Instead, they chose to invest in an asset that had demonstrated its worth over generations.

In contrast, the art market is often more buoyant when plenty of money is circulating in the financial system, which will often, although not always, coincide with periods of vigorous economic growth, at least in certain markets. However, as with the price of antiques, the value of artworks can also vary with fashion and demand. Picking up works by a popular artist early on can be a route to growth in value in any economic climate.

The key appeal of this type of asset for an investor is its tangibility.

Diversification value

The key appeal of this type of asset for an investor is its tangibility. Even if you don’t make any money out of fine art, at least you can still look at it. With fine wine, you can drink it – although there’s also the risk it may turn to vinegar – and with precious metals, you can wear jewellery. The same cannot be said for a stock or bond market investment, still less a crypto-currency.

Collectable assets also fulfil other roles within a portfolio. In general, their values tend not to move in the same way as conventional equity and bond markets. This offers balance to a portfolio, making it less volatile across varying market environments.

For example, during the global financial crisis, the price of gold steadily rose by more than 70% as concerns mounted over the safety of banks, between 2007 and January 2009, a period when equity and corporate bond markets slumped.

The price of gold continued to rise even when share prices were recovering, as countries engaged in competitive currency devaluations to dilute their soaring budget deficits, stemming from the need for governments to rescue and recapitalise failing financial institutions and other companies with a major influence on national economies.

In this environment, gold was seen as a store of value, eventually peaked in October 2011 at around three times its price level in 2007. Since then, however, the price of gold has retreated as investors renew their faith in financial markets, especially with share prices soaring, and economies have recovered.

The appeal of scarcity

The wine market is also governed by a range of factors. Certainly, some is demand from Asia, which in turn depends on the economic health of China – also a significant influence on stock markets. However, more important for the wine market are elements that influence supply, most often weather conditions. For example, last year grape yields in France dipped after severe frosts and heatwaves, reducing the supply of wine to the market, particularly from the Bordeaux region.

Part of the appeal of this class of asset is its scarcity – there is only one Van Gogh ‘Sunflowers’, just a few bottles of 1875 Chateau Margaux. Physical assets are subject to a finite supply. If demand increases, there is no way to produce more so the price rises – part of their appeal.

However, in many cases, it is not easy to invest, at least for those outside the billionaire classes. Prices at the upper end of the art market, in particular, have increasingly become uncoupled from the value of other assets. Last May, Jean-Michel Basquiat’s ‘Untitled’ (1982) sold for $110.5 million – almost double the prediction of auction house Sotheby’s – while in November, Leonardo da Vinci’s ‘Salvator Mundi’ sold for $450.3 million.

Obviously, these are not natural entry points for most investors, and in general they require purchasers to develop specialist knowledge of the field in question, or at least to find an expert to trust. Recent court cases have demonstrated that relying on external advice about extremely expensive artworks entails its own risks.

If you have a precious asset, you also need to store it under the right conditions (…) this leads to a higher ongoing cost of ownership.

If you have a precious asset, you also need to store it under the right conditions. It would be foolhardy to keep a Rembrandt in the garage, or fine wine in the boiler cupboard. It is always possible to store gold bars in the cellar, or even bury them in the garden, but at the risk of theft. A market has developed for companies that store precious assets securely and under ideal physical conditions, but this leads to a higher ongoing cost of ownership.

Uncertain liquidity

Gold bullion is an easier option, since it can be bought in coins or bars at a relatively low entry point. Coins offer smaller denominations, are easier to store, and provide more flexibility in terms of buying and selling. (It is difficult to sell 20% of a gold bar, as opposed to 20 gold coins.) There can be tax advantages to investing in physical gold, as opposed to financial instruments such as certificates – in the UK, for example, there is no stamp duty or VAT to pay.

Gold also benefits from a reasonably liquid market, but this does not apply to all collectable assets. As with real estate, there isn’t always a buyer for a painting or a vintage bottle of wine, at least at the price expected by its owner. Many such assets require a long investment horizon and a cautious approach to valuation and sale opportunities. Again, investors without personal knowledge will likely need to rely on external expertise.

Some of these assets can be accessed more easily through derivative investment instruments – it is possible to buy funds that track the level of a wine index, or gold futures. These instruments get around the immediate problem of liquidity and storage, but investors lose the ‘tangibility’ factor. In some cases, such as wines, they do not track the asset price particularly well, because poor liquidity means that holdings are hard to value.

Other collectables exist, from rare postage stamps and ancient coins to sporting memorabilia, that can also bring growth and diversification to a portfolio. You may not be able to build a collection the size of Elizabeth Taylor’s, but it can bring something different, and beneficial, to your investment mix.