AI is disruptive. It has the potential to be both inflationary and deflationary in different  industries and economic sectors. It should be expected to have varied impacts on precious metals markets. Net-net, though, CPM Group believes that AI will have a price supportive impact on precious metals, in particular gold and silver.

Rarely does any major technological shift unfold smoothly. The consequent disruption resulting from the adoption of such major technological development as AI, in CPM Group’s view, is inherently supportive of portfolio diversifiers like precious metals.

It is still early to say exactly how AI’s integration into society will play out, but one possible scenario could be a disruptive phase followed by a stabilized productivity expansion phase.

This first phase could be characterized by labor displacement and unemployment shocks, resulting in demand softening, deflationary pressures, repricing of assets (to the downside), and credit stress in overextended sectors. Such an environment would likely result in a need for strong policy responses from both fiscal and monetary authorities. Central banks are likely to respond quickly with rate cuts, liquidity injections, and balance sheet expansions. Such a monetary response would prevent real rates from rising strongly, which otherwise might rise due to the deflationary impact of AI. This policy response would be supportive of gold and silver. Additionally, the economic and societal stress created in this phase could further be supportive of demand for assets like gold and silver.

If the global economy successfully absorbs the disruption, the next phase could be more positive for the economy, with productivity increasing, corporate margins expanding, real gross domestic product strengthening, and inflation remaining subdued. In such an environment, real yields could rise, but this largely would depend on how aggressive policy response was during the disruptive phase. If the disruption forced central banks to aggressively ease monetary policy and governments to provide large stimulus packages, the economy would enter the second phase with higher debt loads and larger central bank balance sheets. In this case, real rates would likely remain capped even amid a productivity-led expansion.

There is a need for policy makers to prevent real rates from rising materially because of the high public debt, aging populations, and financial systems that are highly sensitive to increases in rates. 

Another scenario that could play out is one in which the disruption from AI is minimal and the economy relatively painlessly enters the productivity boom phase. In this scenario, real rates would rise. Policy makers are unlikely to tolerate sustained positive real rates, however, given the structural problems like high sovereign debt levels and aging populations. In such a scenario, interest rates are likely to be lowered due to the gains in productivity and productivity’s inflation lowering impact. Some policymakers, including Kevin Warsh — widely discussed as a potential future Chair of the Federal Reserve — have indicated that productivity gains could allow for lower nominal rates in a low-inflation environment.