Wow Sara, so much to dive into here and a really interesting topic!
As you suggest there is no definitive answer; there is just not enough historical data to draw certainties from and even if there was, we would be talking about what has happened not what will happen.
To my mind, the rolling correlation charts here don’t give any reason to suggest wine is any more correlated with stocks than gold.
Completely agree that what matters is how assets behave during drawdowns and while wine fell in 08 (an unprecedented financial failure), it reached new highs by early 2010 and the S&P didn’t do so until 2013.
The wine bull run from 2020 to 2023 coincided with both stocks and gold falling in unison. Yes, it was followed by a wine crash and a stock market rally but that supports the argument for low correlation. (Again this is a short historical timeframe with few examples to draw from.)
Context is really important here too. While we might debate which is a better diversifier wine vs gold, wine appears a much better portfolio diversified than many other assets. The rolling correlation charts S&P 500 vs corporate bonds, Nikkei 225, Hang Seng etc. generally hover around or above +0.5. Even bitcoin and the S&P have had a rolling correlation above 0.5 since 2022.
Of course, some factors that affect stocks also affect wine, like how wealthy people are feeling or interest rates but there are also a tonne of factors that either only affect wine or affect wine in an idiosyncratic way:
- Crop yields impact on scarcity
- Long-term impacts of climate change
- Wine specific boom-and-bust trends like the 09-11 boom in Chinese wine interest, particularly in Bordeaux.
- Trends across the globe especially in emerging markets economies, a few studies have noted as emerging markets grow in wealth (think Brazil, India etc) fine wine tends to enter the zeitgeist.
- Veblen good dynamics, high price of some wines in effect drive demand. The likes of DRC just seem to go up and up in the long-run.
While I agree with a lot of what you have said, I feel like you’re leaving out some of the argument and evidence in favour of wine as a diversifier. I think we agree that the data doesn’t suffice alone and the theory plays an important role.
Thanks Aaran for sharing your point of view, really appreciated!
Just to clarify: I’m discussing safe havens, not just correlation.
My point is that correlation varies over time, and citing low correlation during one of the least correlated periods can be misleading.
I’m not saying gold is the better diversifier, but the better safe haven.
Wine is clearly a diversifier (I wrote so in the last paragraph), with idiosyncratic drivers, but at its core it’s still a luxury consumer cyclical good.
So yes, added in moderation it works—but it’s not a safe haven.
Don't you think the line between a low-correlation diversifier with strong historic returns and "safe haven" gets blurry in practice.
Declining far less than equities and recovering more quickly is safe haven-like as is increasing while other assets are falling.
Slight tangent but ironically the inherent value argument that is said to make gold a safe haven actually applies more to wine than it now does to gold. The ratio of gold to "paper gold" is something like 1:100, gold’s trade price is more a financial construct than a direct measure of physical scarcity or utility and all gold ever made is still in circulation (unlike wine). Fine wine has inherent value, is genuinely scarce and supply reduces over an individuals wines lifetime (unlike gold).
In my opinion, your thinking is leaning too much on “data” rather than the economic mechanics.
In a real recession, rational investors flock to liquidity—cash and gold—not wine. I would too.
Just because an asset has had low drawdowns or rebounded quickly (in the case of wine, that’s debatable —see volatility laundering) doesn’t make it a safe haven. That behaviour may look similar at times, but the motivations and mechanics behind it are totally different.
As for inherent value—wine is scarce, yes, but that doesn’t make it a crisis asset. Gold might be financialised, but it’s still the first port of call when panic hits.
Completely in agreement regarding the liquidity element, wine, especially the kinds of wines that achieve strong long-run returns, could never have the liquidity of cash and gold. I think there is a gap between us on the amount to which the other elements hold true for wine:
Safe havens "hold or increase in value during market turbulence—ideally with negative or near-zero correlation to risk assets like equities"
From what I have seen, when you get down to the producer or wine label level, returns from wine investments can be completely separate from whatever is going on in the macro economy.
This might not be useful for an institutional investor that needs to move 500 million USD around but sure can be for an individual or groups of investors.
Of course the macro matters! Wine doesn’t trade in a vacuum. And it’s even worse because it’s transaction-based—when liquidity dries up, there’s no clean exit. You either wait it out or take a heavy discount.
I didn't mean to suggest the macro economy doesn't matter or that wine trades in a vacuum. Perhaps a more rigorous phrasing would have been, very high returns have historically been achieved at the producer and label specific level in spite of macro-economic headwinds. I agree they are below what would have been achieved in a buoyant market, of course.
Talking only at the macro level - wine represented by the Liv-ex 100, for example - can obscure what is actually achievable if you buy the right wines at the right prices.
Wow Sara, so much to dive into here and a really interesting topic!
As you suggest there is no definitive answer; there is just not enough historical data to draw certainties from and even if there was, we would be talking about what has happened not what will happen.
To my mind, the rolling correlation charts here don’t give any reason to suggest wine is any more correlated with stocks than gold.
Completely agree that what matters is how assets behave during drawdowns and while wine fell in 08 (an unprecedented financial failure), it reached new highs by early 2010 and the S&P didn’t do so until 2013.
The wine bull run from 2020 to 2023 coincided with both stocks and gold falling in unison. Yes, it was followed by a wine crash and a stock market rally but that supports the argument for low correlation. (Again this is a short historical timeframe with few examples to draw from.)
Context is really important here too. While we might debate which is a better diversifier wine vs gold, wine appears a much better portfolio diversified than many other assets. The rolling correlation charts S&P 500 vs corporate bonds, Nikkei 225, Hang Seng etc. generally hover around or above +0.5. Even bitcoin and the S&P have had a rolling correlation above 0.5 since 2022.
Of course, some factors that affect stocks also affect wine, like how wealthy people are feeling or interest rates but there are also a tonne of factors that either only affect wine or affect wine in an idiosyncratic way:
- Crop yields impact on scarcity
- Long-term impacts of climate change
- Wine specific boom-and-bust trends like the 09-11 boom in Chinese wine interest, particularly in Bordeaux.
- Trends across the globe especially in emerging markets economies, a few studies have noted as emerging markets grow in wealth (think Brazil, India etc) fine wine tends to enter the zeitgeist.
- Veblen good dynamics, high price of some wines in effect drive demand. The likes of DRC just seem to go up and up in the long-run.
While I agree with a lot of what you have said, I feel like you’re leaving out some of the argument and evidence in favour of wine as a diversifier. I think we agree that the data doesn’t suffice alone and the theory plays an important role.
p.s. Sorry for the essay response!
Thanks Aaran for sharing your point of view, really appreciated!
Just to clarify: I’m discussing safe havens, not just correlation.
My point is that correlation varies over time, and citing low correlation during one of the least correlated periods can be misleading.
I’m not saying gold is the better diversifier, but the better safe haven.
Wine is clearly a diversifier (I wrote so in the last paragraph), with idiosyncratic drivers, but at its core it’s still a luxury consumer cyclical good.
So yes, added in moderation it works—but it’s not a safe haven.
Don't you think the line between a low-correlation diversifier with strong historic returns and "safe haven" gets blurry in practice.
Declining far less than equities and recovering more quickly is safe haven-like as is increasing while other assets are falling.
Slight tangent but ironically the inherent value argument that is said to make gold a safe haven actually applies more to wine than it now does to gold. The ratio of gold to "paper gold" is something like 1:100, gold’s trade price is more a financial construct than a direct measure of physical scarcity or utility and all gold ever made is still in circulation (unlike wine). Fine wine has inherent value, is genuinely scarce and supply reduces over an individuals wines lifetime (unlike gold).
In my opinion, your thinking is leaning too much on “data” rather than the economic mechanics.
In a real recession, rational investors flock to liquidity—cash and gold—not wine. I would too.
Just because an asset has had low drawdowns or rebounded quickly (in the case of wine, that’s debatable —see volatility laundering) doesn’t make it a safe haven. That behaviour may look similar at times, but the motivations and mechanics behind it are totally different.
As for inherent value—wine is scarce, yes, but that doesn’t make it a crisis asset. Gold might be financialised, but it’s still the first port of call when panic hits.
Completely in agreement regarding the liquidity element, wine, especially the kinds of wines that achieve strong long-run returns, could never have the liquidity of cash and gold. I think there is a gap between us on the amount to which the other elements hold true for wine:
Safe havens "hold or increase in value during market turbulence—ideally with negative or near-zero correlation to risk assets like equities"
From what I have seen, when you get down to the producer or wine label level, returns from wine investments can be completely separate from whatever is going on in the macro economy.
This might not be useful for an institutional investor that needs to move 500 million USD around but sure can be for an individual or groups of investors.
Of course the macro matters! Wine doesn’t trade in a vacuum. And it’s even worse because it’s transaction-based—when liquidity dries up, there’s no clean exit. You either wait it out or take a heavy discount.
I didn't mean to suggest the macro economy doesn't matter or that wine trades in a vacuum. Perhaps a more rigorous phrasing would have been, very high returns have historically been achieved at the producer and label specific level in spite of macro-economic headwinds. I agree they are below what would have been achieved in a buoyant market, of course.
Talking only at the macro level - wine represented by the Liv-ex 100, for example - can obscure what is actually achievable if you buy the right wines at the right prices.
Excellent post, as usual!
Thank you Angelo! 🫶🏻