How do Emerging Markets Affect Gold Prices

Deutsche Bank Research is out with a new piece on emerging market stories.

The question here is – how might these nine stories affect the precious metals markets in the near term.

The nine plays are:

1. Turkey: in a political crisis, which caused a depreciation in the foreign exchange markets. The central bank responded with rate hikes. Can the Turkish lira survive the heated political conditions?

2. South Africa: economy is weak with high inflation. Can the central banks’ limited foreign reserves survive given the central bank’s rate increases?

3. Argentina: central bank stopped intervening in the foreign exchange markets, causing the peso to depreciate further. How far can the peso drop before the central bank gets involved again?

4. Brazil: trouble continues to loom because of the stalling of commodity price appreciation. Can Brazil continue to be a hot commodity without commodities?

5. Mexico: labor market, financial, and fiscal reforms appear to be working, with private energy investment set to boost Mexico’s already accelerating economy. However, will a weaker U.S. hurt Mexico’s uptick?

6. Ukraine: political conditions far from good, with an overvalued currency and large current account deficits and low reserves. When will Ukraine blow up?

7. Russia: Olympics looking good, although inflation still a problem. The snail-speed movement towards privatization and a better business climate could be sped up.

8. China: hard landing appears to have been avoided, with a strong and growing domestic demand likely to provide enough sustainable growth for a while.

9. India: recent changes to fuel prices and elimination of tariffs likely to provide greater business investment, with the potential of inflation targeting by India’s central bank to lower inflation.

The nine stories of emerging markets are shown color-coded in above map. The colors represent the magnitude with which each country’s conditions could potentially affect global precious metals markets conditions.

On top of the list is China, with any sign of a hard landing or weak domestic demand likely to push precious metals prices much higher. Analysts currently expect strong (but not inflationary-inducing) growth from the country in the coming couple of years. Should this expectation falter, investors will certainly turn to precious metals.

In second place is India. India continues to be a standard bearer of emerging markets gone right. Should indications turn sour, be it that the inflation targeting or tariff changes or other recent policy decisions don’t turn out as planned, business conditions in India could move the precious metals markets higher.

In third is Brazil. Perhaps more so than any other economy, individuals in Brazil have benefitted most from the commodities boom. The question now is how well can businesses in Brazil compete without a commodities boom.

The rest of the ranking are given on the map, with Russia in fourth, Argentina in fifth, Mexico in sixth, Ukraine in seventh, Turkey in eighth, and South Africa in ninth.

Overall, as global retail sales and employment conditions showed, the global economy slowed in the first month of 2014, with gold holders rewarded for their foresight so far.