Invest in liquid gold

In the right market conditions, rare single-malt scotch whisky can fetch intoxicating prices.

Last November, a bottle of Black Bowmore First edition from 1993, which originally cost £65 a bottle changed hands for £2,800 in Glasgow—a new record.

With a proven record of price increases and demonstrated resilience to global economic downturns, Scotch whisky is gaining traction as an alternative investment.

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“As a specialist market that’s much smaller than fine wine or other commodities, it appears to be strong when other sectors are struggling,” says Jonny McCormick, a U.K.-based journalist for the Whisky Advocate.

For the 12 months ending June 2012, Scotch exports increased 12%, according to the Scotch Whisky Association. And the World Whisky Index (WWI), an online trading enterprise based in the Netherlands, returned 12.1% in 2012.

Michel Kappen, the ex-banker who founded the WWI, says, “We speak to our people in Scotland at the distillery and they say it’s a crazy time.

“People all over the world are asking for the luxury rare malts. So people look to this product not for drinking, but for investment.”

Nevertheless, consumption demand for luxury malts is still strong, especially in BRIC countries where it’s becoming the choice drink for young affluents. And while the U.S. and France remain Scotch whisky’s biggest export markets, sales to Venezuela and India leapt 31% and 28%, respectively, in 2012.

The rarer, the better

Whisky prices increase as supply tightens because distilleries produce limited batches, and it can take up to 25 years for the liquor to mature. Brands that do well at auction include Macallan, Glenfiddich, Bowmore, Ardbeg, Springbank and Highland Park.

New markets in India and China have driven higher auction prices. “What we’re seeing in the last few years is that Chinese people are starting to buy whisky from great names like Macallan and Ardbeg—the hot stuff,” says Kappen. “And they pay much more for a bottle than Europeans or Americans.”

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The major risk of investing in whisky is liquidity, adds Kappen. “Investors may experience problems selling their stocks in the future.”

But McCormick points out that strong brands can lower risk. “There’s more Macallan sold for higher prices than any other brand,” he says, adding that supplies from closed distilleries such as Port Ellen and Brora also do well.

Macallan, explains McCormick, limits the availability of its high-value collectibles due to a good understanding of the luxury market. “They’ve reaped the benefits of having an impressive stock of older whiskies and have cultivated markets successfully across the world, including Asia.”

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Whisky in Canada

Canadian whiskies are blended whiskies and the flavour remains broadly consistent over time. So a Crown Royal from the 1980s will taste similar to one bottled today, explains whisky journalist Jonny McCormick. For that reason, it won’t fetch much at auction.

However, he points out Forty Creek Distillery (formerly Kittling Ridge) produces terrific whiskies. Founded by John Hall, a former winemaker, it’s created limited edition runs for which demand outstrips supply.

“The distillery made a whisky called Confederation Oak that sold at Bonhams New York earlier last year. It reached a good price [$380 for a lot that included other whiskies]. However, they’re probably being bought to drink, rather than as investments.”

Hassle factor

• Finding storage for large collections can be a problem.
• Older bottles with less robust seals, especially screwcaps, will allow evaporation.
• Colours can naturally fade from the whisky with some very old bottlings; labels can also fade.
• To spot fakes, you must depend on the vigilance of the auction house specialists and condition reports.

Brand strength also helps limit price volatility. “Collectible whisky is unlikely to experience a massive collapse or rally,” says McCormick.

“While the latter half of 2012 was not as strong as the first half, as some collectible series such as Diageo’s Rare Malts Selection were not performing as well, the top-end collectibles continue to increase in value.”

Compared to wine, investing in whisky is less risky, adds Kappen. “Wine is more like an option; there is a period [after which] the wine will lose its quality. With whisky, that’s not possible. You could keep it for centuries and the whisky will stay the same.”

Wine’s also much fussier than whisky to store. With wine, the wrong temperature can make the bottle go bad. With whisky, just sit it upright in a cool place.

And while storage cost is low, selling will shave off some profit, particularly if the sale occurs at an auction house. “The costs can be as low as 10% of the hammer price for online enterprises like the Scotch Whisky Auctions in Glasgow and 15% to 25% for live-bidding auction houses.

“But it’s often negotiable depending on how much whisky you have to sell and what quality,” says McCormick.

Additional charges may include insurance, and some houses charge for photography for the auction catalogues. Take into account possible capital gains taxes, and it’s technically possible to incur a loss on the transaction, he warns.

While there are investment vehicles for wine—in Canada, there’s Toronto-based Accilent Capital Management—such options for whisky investment have yet to mature.

Kappen’s plans to launch the world’s first whisky fund in 2012 were delayed and he’s currently in negotiations with a few parties about the conditions for a 2013 launch.

Rayann Huang is a Toronto-based financial writer.