Despite the recent fluctuation of gold prices, the global economy is in relatively good health, says BMO Harris Private Banking in its May outlook report.

This bodes well for Canada, says chief investment strategist Daniel Theriault, who adds, “For the last two to three years, broad trends have driven commodities to perform as a homogeneous group.

“[But] the subsectors—precious metals, base metals, agriculture and energy—are now decoupling, which could have positive implications for Canada’s economic outlook.”

Read: Scotiabank commodity index dips

Highlights from the report include:

  • Canada will lag the U.S. over the next year
  • Gold prices will drop, but it will still be overvalued
  • U.S. equity markets will continue their upward trends
  • Returns on bonds will be driven more by term exposure than by credit type

Gold prices stirred, not shaken

When gold prices are high, investors typically anticipate inflation and seek safe havens to protect their assets.

However, BMO’s report finds prices have been dropping since early 2013 due to a general weakness in commodity prices. It says analysts have blamed the Eurozone’s ongoing debt crisis for the fall, as well as Cyprus’ plan to sell off its gold reserve.

Read: Will gold rise or fall?

The report adds gold is overvalued at its current price. If prices slide, gold will be at more realistic levels.

“The U.S. dollar has replaced gold as the primary reserve currency for central bankers around the world, [but] both gold and the greenback are important to investors as stores of value,” says Theriault. That said, he warns investors to be wary of purchasing gold above its long-term, inflation-adjusted price.

Read: Faceoff: Precious metals

U.S. growth pushes forward

Equity markets in the U.S. have continued their upward trend since April, adding to impressive gains in the first four months of this year.

However, the report notes recent economic data was less upbeat. It finds:

  • job market numbers in the U.S. were weak in March;
  • the Institute for Supply Management Index of new orders rose only slightly;
  • the U.S. economy weakened due to concern over sequestration spending cuts; and
  • 10-year U.S. Treasury bonds—a good proxy for the overall U.S. bond market—peaked at a yield of 2.04% in mid-March, closing off at 1.85%.

Read: Canada must look beyond China, U.S. for export growth

The only positive data revealed is U.S. stocks advanced 1.93%, bringing the year-to-date return of the S&P 500 to 12.74%.

Canada’s performance lacklustre

Theriault says, ”In Canada, markets slumped by 2.07%, bringing the overall return for the year to 1.2%. Most of the underperformance, however, is linked directly to the materials sector.”

Read: Oil, housing concerns will weigh on Canada

The report notes Canada’s economy will likely lag the U.S. by about 0.5% over the next twelve months. Further, as the U.S. Federal Reserve will be keeping interest rates low for the remainder of 2013, the Bank of Canada will likely follow suit.

Read: Canadians on spending spree

Performance of fixed income

April was an interesting month in the world of fixed income, says the report. It finds:

  • bond returns were driven by term exposure rather than credit type;
  • the overall DEX Canadian Universe Bond Index increased by 1.14%, the Short Term Bond Index (1-5 years) rose 0.37%, the Mid Term Bond Index (5-10 years) returned 1.25%, and the Long Term Bond Index (10+ years) fell 2.22%; and
  • performance of high-yield bonds was driven by monetary policy and the underlying health of the corporate sector.

“Investors are anxious about Europe’s debt woes and cooler economic growth in the U.S.,” says Theriault. “Deflationary fears are resurfacing, and that will continue to impact the bond market.”

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