Emerging Markets Could Drive Gold Prices Higher
Gold bugs must pay attention to the emerging markets to see where gold prices could be headed next.
Currently, currencies from emerging-market economies like Turkey, India, and Brazil are facing severe scrutiny. It has to be considered whether this decline in currencies will give a boost to precious metal prices.
It’s very possible.
Turkish Investors and Consumers Rushing to Buy Gold
A lot of emerging markets have an appetite for gold. With falling currencies, we could see demand increase.
In Turkey, we are seeing evidence of this already. Mind you, the Turkish lira has declined about 20% year-to-date against the U.S. dollar, and inflation in the country is running in the double-digits.
What are Turkish investors doing? They are buying gold.
In the first four months of 2018, Turkey imported 118 metric tons of gold bullion. This is the most on record for the first four months of the year.
For the entire year of 2017, the country imported a record amount of gold bullion. In 2018, the previous year’s record could be broken.
This isn’t all from Turkey.
Turkish consumers are rushing to buy gold. Gold shops are witnessing rapid buying.
Gokhan Karakan, who operates a gold exchange office in Istanbul’s Grand Bazaar, said, “People think there is a trend here and choose to buy gold until uncertainty is out of the way.” (Source: “Turkey’s Election Angst Is Driving Up Demand for Gold Coins,” Bloomberg, May 25, 2018.)
India’s Gold Demand Remains Solid
India is witnessing solid gold demand as well. In April alone, $2.6 billion worth of gold was imported to the country. (Source: “Quick Estimates For Selected Major Commodities For April 2018,” India Ministry of Commerce and Industry, last accessed June 4, 2018.)
The Indian rupee is down roughly five percent against the U.S. dollar so far this year. If it drops further, don’t be shocked to see Indian investors and consumers do exactly what’s happening in Turkey: buy more gold.
Look at two other currencies from emerging economies:
- The Brazilian real is down by over 11% year-to-date.
- The Argentinian peso has tumbled 25% year-to date.
Could we see an increase in gold buying in Brazil and Argentina as well?
Gold Prices in Light of What’s Happening in Emerging Markets
Let’s go back a little…
In the midst of the 2008/2009 financial crisis, the Federal Reserve and major central banks lowered interest rates. With this, “the trade” became very simple: borrow in a country with low interest rates and invest in countries with higher interest rates.
At that time, emerging markets were offering higher interest rates. So, all of a sudden, emerging-market economies witnessed a lot of capital inflows.
These inflows raised currency values and dampened gold demand.
Now the Federal Reserve and other major central banks are raising interest rates. With this, those who rushed into emerging markets could be looking to bring their money back. This means that emerging-market currencies could tumble further and gold demand could be revived in those countries.
Keeping all this in mind, I can’t help but be bullish on gold prices. The yellow precious metal has remained low over the past few years, but, in the coming month and quarters, we could see gold prices surge.
I will repeat what I said earlier: emerging markets could be the catalyst that sends gold prices higher. Don’t ignore what’s happening there.