Economic worries fuels move into silver and gold, new research suggests

Precious metals continue to shine brightest among investors amid renewed uncertainty over the outlook for the global economy, according to new research by Lloyds TSB published today (Wednesday July 13).

Precious metals, that is 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 at 3.7%, albeit from a low base, followed by international equities at 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 of 13%.

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 at 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 silver has weakened 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 at 36%, closely followed by commodities at 34%. Similarly, precious metals have provided the highest returns over the past ten years at 416%, with the fall in interest rates increasing the opportunity cost of holding this asset. Commodities recorded the second biggest increase over the ten years to 2011 at 208%, followed by residential property at 135%.

‘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,’ said Suren Thiru, economist at Lloyds TSB.

‘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,’ Thiru added.

The research also shows that cash provided the smallest returns. With the official bank rate still at a record low, holding cash delivered the lowest returns at 0.3% over the first six months of the year.

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 recorded a return of 3.7% over the first six months, outperforming residential property at 1.6%. However, the improvement in returns from commercial property is from a low base following the dramatic falls recorded in 2008.
 
UK bonds delivered a total return of 2.2% over the first half of 2011, double the return from international bonds at 1.1%. This reflects, in part, continued investor confidence in the UK government's fiscal austerity plan.