Investing in Whisky: The New Gold

In this wild and untamed financial market, investors are struggling to find the ideal investment opportunities. Bulls are rushing into the stock market with the conviction that there’s plenty of growth ahead, while bears are seeking the perfect hedge to protect their liquidity. Gold is the obvious choice for hedging, but what if I told you that many consider whisky to be even safer and more profitable?

No one was ready for what 2020 had to offer. Many believed the growth run was limited in an already frothy financial market. The global rise in debt, trade slowdown, and many other indicators were pointing towards an imminent market correction; however, no one was prepared for the uncertainty we were all going through this year.

The global surge of COVID-19 in March has placed the world at a near standstill. Economies and businesses were shut down to control the spread of the virus. Accordingly, consumption dropped, investments in various productive sectors such as manufacturing were cut, global trade plunged, and government spending skyrocketed. Economies in 2020 have lost over 20% of their GDP, which hasn’t been reflected across global and specifically US markets yet. Monetary policies such as near-zero interest rates and trillions of dollars in rescue packages have kept markets relatively stable until now but added plenty of uncertainty to an already volatile market.

The million-dollar question that everyone is asking is, ‘What is the safest and most profitable investment in these turbulent times’. Many have been rushing towards gold, one of the oldest and most reliable currencies under a free market system, which rises when the dollar and global markets are in jeopardy. Consequently, gold price has risen to an all-time high — nearly $2,000 per ounce. Even Warren Buffett, who has always been against investing in gold, has just purchased over $564 million worth of shares in Barrick Gold Corporation (NYSE:GOLD).

But what if I told you that whisky rivals gold as a great store of value and a reliable medium to long-term investment? Over the past 10 years, demand for whisky has risen significantly due to consumption growth across large markets like China and an increasing number of knowledgeable consumers flocking towards the more refined whiskies. Old and rare whiskies have been mostly impacted due to their limited supply. Since 2010, rare whisky appreciated by over 500%, eclipsing returns of investments in other key luxury asset classes such as collectible coins, wine, and art. Moreover, if compared strictly to the US stock market, which has seen the longest bull run in history, an investment in rare whisky would be worth 3 times as much.

Luxury asset appreciation since 2010 Return on investment over the past 10 years for key luxury asset classes

Source: Knight Frank Luxury Investment Index (2020)

Rare whiskies, as an asset class, have not shown signs of weakening in the foreseeable future. If we look exclusively at the 1,000 most sought-after Scottish single malt whisky bottles measured in the Rare Whisky Apex 1000 Index, we observe that these unicorn bottles increased by almost 7-fold since 2010 and are still rising even throughout 2020 and the unstable markets.

Rare Whisky Apex 1000 Index Changes in the value of a collection of one thousand of the most sought after bottles of Single malt Scotch

Source: Rare Whisky 101 (2020)

The whisky market is also becoming more liquid — no pun intended. The number of bottles sold at auction in the United Kingdom tripled in the past 5 years, with a total of 144 thousand bottles sold at auction in 2019 for a total value of £58 million.

Even the whisky makers and various stakeholders across the value chain are bullish about the whisky industry in the future. A testament is the large influx of investments to build new distilleries worldwide and a large increase in the yearly production of new whisky spirits across many key distilleries. For example, The Macallan— a luxury single malt scotch whisky — has recently built and opened the doors of a new £140 million distillery, doubling its previous production capacity. The Glenfiddich and many other whisky distilleries are also expanding their production to meet future demand.

Since 2010, all the metrics have pointed toward whisky as a profitable investment. However, a wise investor always remembers that past performance does not guarantee future results. Is whisky still a good investment and a sensible hedge in the current volatile market?

As a quick assessment, let’s compare whisky to the other asset classes and point out the key reason why it’s a ‘safer’ bet in the current market situation.

• Unlike stocks and bonds, whisky is tangible, hence doesn’t run the risk of defaulting. If no one wants to buy it, at least you can drink it.

• Unlike precious metals and currency, old and rare whisky cannot be simply mined or printed; itssupply is limited by old grandfather time. For example, a 50-year-old Macallan requires at least 50 years in a barrel, and since distilleries did not anticipate such a spike in whisky demand in the 1960s and 1970s, stock of older whiskies is quite limited.

• Unlike real estate, whisky does not depreciate or carry high maintenance requirements and costs. Storing whisky is relatively easy; if bottled, whisky does not spoil and can be conserved for hundreds of years if kept in a controlled environment.

What is noteworthy in the comparison above is that rare whisky cannot be easily created since it requires many years of aging in casks, and quality is strictly regulated by various whisky associations. Hence, unlike other assets, an aged whisky will never lose its value since the quantity of older bottles and aged whisky casks is very limited. This innately makes whisky a great hedge since it will most likely retain its value in uncertain times and in the medium to long term.

Unlike stocks and bonds, whisky is tangible, hence doesn’t run the risk of defaulting. If no one wants to buy it, at least you can drink it.

However, even though whisky can be an appealing investment, I leave you with a strong word of caution: Making the right investment in whisky requires an ample amount of knowledge about the industry.

When investing in whisky bottles, one must consider many variables to ensure rarity and quality when selecting whiskies. Here are some of the key ones to keep in mind:

• Distillery and brand: The whisky distillery and brand are often the biggest testament to quality.

• Rarity: The fewer bottles released, the more valuable the whisky.

• Age and vintage: General rule of thumb, the older the whisky, the more expensive it is. There are exceptions to the rule for younger whiskies, such as unique vintages.

• Cask type: Some distilleries are more renowned for aging whisky in a specific cask type.

• Warehouse and whisky-making process: Where and how a whisky is produced and aged is an indication of its quality.

• Synergies with other whiskies: Collectors often focus on a series of bottles that they consider valuable. Hence, bottles with synergies with a story, a collection, or sequence numbered bottles can be higher in value.

If investing in whisky casks, I recommend that all new investors tread with caution because it carries more risk than investing in bottles. Since whisky in a cask evolves over time, one cannot accurately predict the quality of the product and the return on investment. A cask might have off-notes that will ruin the whisky if aged for too long, too much whisky can evaporate during the aging process (a phenomenon known as the angel’s share), and the whisky can possibly mature faster and reach its peak too early impacting its bottling age and final resell value. These are only a few examples of uncontrolled variables when investing in casks. So unless you can have quality guarantees from the merchant or you are purchasing a very unique cask, investing in bottles is often the easier and safer route.

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Jimmy is a whisky enthusiast and a long-standing collector with over 10 years of experience. He specializes in Scottish whisky and has a deep understanding of whisky economics and pricing. Over the years, he built a whisky collection of many unique bottles and owns numerous casks maturing across various coveted distilleries across Scotland.