Lloyds TSB Suggest That Precious Metal Will Shine Brightest in 2011

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New research by Lloyds TSB suggests that economic worries fuels a move into Silver and Gold

Precious metals continue to shine brightest among investors amid renewed uncertainty over the outlook for the global economy, according to new research. Published by Lloyds TSB, one of the UKs largest bank account and financial services providers, the study showed precious metals (gold, silver and platinum) were the best performing asset class over the first half of 2011 - providing investors with a return of 4.9%.

All nine asset classes analysed delivered a positive return for investors in the first six months of 2011. Commercial property recorded the second highest return (3.7%) albeit from a low base, followed by international equities (3.2%). However, the average return from the nine asset classes over the first half of the year of 2.3% was much weaker than the returns enjoyed over the same period in 2010 (13%).

Silver was the top performer among precious metals in the first half of 2011…
Silver significantly outperformed the other precious metals over the first half of 2011 with prices rising by 14%; more than double the increase in gold prices (6.6%). In contrast, there was a 1.9% fall in the value of platinum. In addition to its position as a safe haven investment, high demand for industrial uses has contributed to the strong rise in the price of silver.

…but has weakened significantly since April
Since reaching a peak of $49 per troy ounce in April – a rise of 59% since the start of the year, the price of silver dropped by over a quarter (28%) to reach $35 per troy ounce by the end of June, amid a period of increased market volatility. However, silver prices at the end of June were still 87% higher than at the same point in 2010.

Precious metals also delivered the highest returns over the past year (36%), closely followed by commodities (34%). Similarly, precious metals have provided the highest returns over the past ten years (416%) with the fall in interest rates increasing the opportunity cost of holding this asset. Commodities (208%) recorded the second biggest increase over the ten years to 2011, followed by residential property1 (135%).

Suren Thiru, economist at Lloyds TSB, commented:
"Precious metals continue to provide the best returns for investors against a backdrop of continued anxiety over the prospects for global economic growth and concerns over Eurozone sovereign debt risk and high inflation. Precious metals have benefited from lower interest rates over recent years as well as their position as a hedge against inflation and financial market uncertainty.

"The prospects for asset prices over the remainder of 2011 are likely to be driven in part by the level of demand from China and India. The extent to which higher commodity prices and fiscal austerity measures affect the global economic recovery will also be important factors."

ADDITIONAL FINDINGS:

Cash provided the smallest returns:

With the official bank rate still at a record low, holding cash delivered the lowest returns (0.3%) over the first six months of the year.

Coffee records the largest commodity price rise:

Coffee was the top performing commodity over the first half of the year with a price rise of 15%. Pressures on the supply side, due to poor harvests in some of the major coffee producing areas, have been a key factor in the marked increase in coffee prices. In contrast, hard wheat was the worst performing commodity, recording a price decline of -18%.

Commercial property outperforms residential property:

Commercial property recorded a return of 3.7% over the first six months, outperforming residential property (1.6%). However, the improvement in returns from commercial property is from a low base following the dramatic falls recorded in 2008.

UK bonds outperform international bonds:

UK bonds delivered a total return of 2.2% over the first half of 2011; double the return from international bonds (1.1%). This reflects, in part, continued investor confidence in the UK government's fiscal austerity plan.

Table 1: Asset class returns over 6 months, 1 year and 10 years

As at June 2011 - 6 month % change - 1 year % change - 10 year % change
Precious Metals - 4.9% - 36% - 416%
Commodities - 0.4% - 34% - 208%
UK Shares     - 3.0% - 26% - 59%
UK Commercial Property - 3.7% - 8.3% - 88%
International Shares - 3.2% - 22% - 25%
UK Bonds    - 2.2% - 4.0% - 72%
International Bonds - 1.1% - 0.9% - 49%
UK Residential Property - 1.6% - 1.0% - 135%
Cash    - 0.3% - 0.6% - 45%
Average - 2.3% - 15% - 122%

Source: Datastream, Lloyds TSB calculations.

Table 2: Precious metals returns over 6 months, 1 year and 10 years

As at June 2011 - 6 month % change - 1 year % change - 10 year % change
Silver     - 14% - 87% - 708%
Gold     - 6.6% - 21% - 457%
Platinum - 1.9% - 12% - 209%

Source: Datastream, Lloyds TSB calculations.

EDITORS' NOTES:

Based on house price changes and rental income (net of typical maintenance costs, void periods and irrecoverable costs of letting a property).

1. The following indices have been used as benchmarks for the nine asset classes
UK Bonds: Merrill Lynch UK Broad Market Total Return bond index
International Bonds- Citigroup World Government Bond Index All Maturities Total Returns (Local currency)
UK Shares- FTSE All Share Total Return Index (includes dividends)
International Shares- MSCI World Total Return Index – Local currency (includes dividends)
Commodities- Reuters CRB Commodity Price Index
Precious Metals – Reuters CRB Precious Metals Index
UK Commercial Property- IPD Total Return Index, time weighted. (Includes deduction of typical maintenance costs and other associated irrecoverable costs such as management fees, but no adjustment has been made for necessary investment to improve quality to maintain the property in line with current standards).
UK Residential Property- Total Return from houses including rents reinvested (based on Halifax House Price Index and RPI series on rent). See (3) below for further details.
Cash – JPM Morgan Cash (under 1 month) Total Return Index

2. Total returns data have been used with the exception of Commodities and Precious Metals, which are for price changes only.

3. The total return for residential property has been derived by combining the house price increase from the Halifax house price index with the rental return derived by deflating the RPI Housing rent index against current buy to let rents (source: CLG). Estimated maintenance costs associated with owning a home and voids and irrecoverable costs of letting a property (e.g. management fees, estimated by the IPD to be approximately 33% of gross income) have been deducted from the total return. There is no adjustment for investment in the property to improve its quality to keep it up-to-date with expected standards. This could result in some overstatement of returns.

4. UK shares are based on the FTSE All Share index. The index does not specifically make an adjustment for survivor bias. Survivor bias stems from equity indices being based on existing companies. They, therefore, do not explicitly factor in the negative impact associated with buying shares in a company that fails. As a result, equity indices are prone to overestimate returns over time. The periodic rebalancing of the FTSE indices (where every constituent is liquidity screened and those failing the liquidity screen are removed) helps to reduce the extent of such bias. Nonetheless, some caution should be exercised in evaluating stockmarket performance over a significant length of time.

5. International indices have been measured in local currency terms.

6. Data is measured as at June 30th of each year.            

This report is prepared from information that we believe is collated with care, however, it is only intended to highlight issues and it is not intended to be comprehensive. We reserve the right to vary our methodology and to edit or discontinue/withdraw this, or any other report. Any use of this report for an individual's own or third party commercial purposes is done entirely at the risk of the person making such use and solely the responsibility of the person or persons making such reliance. © Lloyds TSB Bank plc all rights reserved 2011.

For more information:
Nathan Hatch
0207 356 2374
nathan.hatch(at)lloydstsb(dot)co(dot)uk

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