|Commodity prices treble in ten years|
|Saturday, 17 September 2011 14:09|
Commodity prices have trebled over the last ten years, according to the Lloyds TSB Private Banking Commodities Monitor.
Commodity prices have risen by 232%1 since 2001 – equivalent to an average annual return of 13%. This is three times the average annual returns from UK equities2 (4%) and greater than the return from UK residential property3 (9% per annum) over the same period.
Strong demand from emerging economies such as India and China and the weakening in the US dollar have been the key drivers behind the significant growth in commodity prices. The US dollar has fallen by almost a quarter (24%) on a trade weighted basis over the decade to August 2011.
At a sector level4 (i.e. precious metals, base metals, energy and agriculture), the price of precious metals has risen by 554% over the past decade, double the increase in energy prices (276%), the second highest performing sector.
The price of precious metals has been boosted by investors looking to safeguard the value of their investments from the turbulence in the financial markets in recent years. The fall in interest rates over the period has also boosted the relative attractiveness of holding precious metals.
Silver experienced the biggest increase in prices
Over the past decade, 14 of the 20 commodities tracked have at least trebled in value. With an 885% increase in prices, Silver recorded the strongest increase during the last ten years. In addition to its position as a safe haven investment, high demand for industrial uses has also contributed to the strong rise in the price of silver. Gold, at 569%, saw the second highest increase, followed by Copper (527%) and Tin (524%). Although gold prices at the end of August 2011 recorded their first weekly drop since July 2011 (-4%), prices remain 46% higher than at the same point in 2010.
At the other end of the scale, Aluminium (76%) experienced the smallest increase following a significant fall in the price of this metal in 2008 (-36%) as the global economy contracted.
Ash Misra, Head of Investments at Lloyds TSB Private Banking, commented:
"The initial phase of the decade-long, current bull market in commodities had its origin in supply constraints resulting from years of under-investment in productive capacity during the nearly two decades of falling commodity prices in the 1980s and 1990s. Latterly, prices have been supported, perhaps in equal measure, by strong emerging market demand, a weak US Dollar, monetary stimulus and low interest rate policies of western central banks and the inflation threat arising from systematic monetary debasement as deficit-funded public sector (government) spending has sought to offset declines in spending by an over-leveraged private (households, businesses) sector.”
“Precious metals have been the best performing commodity over the period, reflecting their position as a hedge for investors against inflation and financial market uncertainty. Their prices have also been boosted by increasing emerging market demand and exceptionally low interest rates. Another characteristic holding precious metal prices in good stead is the absence of counter-party risk – unlike other assets, this one is not a corresponding liability in a counter-party’s books – which can sustain premium valuation in this asset class during periods of extreme counter-party risk aversion"
"The prospects for commodity prices are likely to be driven in part by the further evolution of these above drivers and the extent to which the rather weak global economic recovery continues."
OTHER KEY FINDINGS:
Commodity prices up by a third over the past year
Commodity prices have risen by 33% over the past year. At a sector level, precious metals recorded the biggest increase (56%), while base metals (20%) saw the smallest price rise. All 20 of the commodities tracked have risen in value over the past year.
Silver saw the biggest increase over the last 12 months
Silver was the top performing commodity over the 12 months to August with a price rise of 119%. Recent concerns over the scale of the debt problems in the Eurozone and the US have further increased the shift in investor sentiment towards safe haven investments. Corn recorded the second biggest increase (93%), reflecting greater demand from China and for ethanol. Increasing pressures on supply due to adverse weather conditions hampering harvests in some of the major corn producing areas, including in the US, have also put upward pressure on prices. In contrast, Natural Gas (6%) recorded the smallest rise in value.
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