Top themes spotlight: Prepare for uncertainty with precious metals

A timely opportunity for precious metals

Markets continue to be supported by healthy financial conditions and global synchronized growth. While we expect the current bull market to remain intact, we see the prospect of higher inflation and rising geopolitical risk as catalysts for pockets of equity market volatility. Investors looking for protection against tail risks, but who still want to participate in the bull market may want to consider Precious metals, specifically gold and silver, as a short-term theme in their portfolio.

Higher inflation and rising geopolitical risks could lead to pockets of equity market volatility.

Supportive backdrop paving the way

In 2017, we experienced 'goldilocks conditions' that saw solid global growth without a significant pickup in inflation. We expect growth to remain strong this year while inflation expectations rise due to added fiscal stimulus and limited economic 'slack'. Recent reports – especially wage growth and the Beige Book – confirm that inflation is beginning to trend towards the Federal Reserve's target. But at the moment inflation remains below target and there is little sign of overheating. We expect the Fed to increase rates at a gradual pace, which should be supportive of precious metal prices. 

Further, we expect real global growth of 4.1% this year which should support demand for precious metals. For example, 55-60% of silver's demand comes from industrial use. We also forecast a weaker US dollar over the next six months vs major currencies such as the euro and the Canadian dollar. A weaker US dollar would provide another tailwind to gold and silver prices.

Strong global growth should support demand for precious metals.

Offsetting certain portfolio risk

Finally, precious metals may help offset portfolio risk during geopolitical flare-ups. For example, we currently face uncertainty around global trade and we foresee a risk case where trade tensions between the US and other world powers escalate into a full-blown trade war. Although we still view this as a low-probability risk, and we don't believe trade tensions will derail global growth, we would expect precious metals to hold their value during such a crisis.

We would expect precious metals to hold their value during a trade war.

Laura Kane

Head of Investment Themes Americas
Global Wealth Management
Chief Investment Office

Matthew DeMichiel

Thematic Strategist
Global Wealth Management
Chief Investment Office

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