The Morgan Stanley Capital International Emerging Markets Index lists 24 countries representing 10 percent of world market capitalization. They are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The classifications differ, but all of them include BRIC countries, i.e. Brazil, Russia, India and China. The two last countries are home to 40 percent of the world’s labor force and population, which make them real emerging market powerhouses.
Emerging Markets and Gold
What are the links between the emerging markets and gold? First, the emerging countries are gaining importance, so they should exert stronger impact on the gold market in the future. Having said that, investors should remember that major gold trading marketplaces are in advanced economies and they still dominate the process of gold prices discovery.
Second, emerging markets are more volatile. The institutions are weaker, while economic policies are more populist, which make these countries more vulnerable to economic crises. It should theoretically support the safe-haven demand for gold. However, investors should remember that these countries are heavily indebted in US dollars. It makes them vulnerable to sharp and sudden appreciation of the greenback. In other words, the emerging markets usually fall into troubles when the US dollar strengthens. In such environment, the price of gold is not likely to rise.
The bottom line is that gold is not strongly linked to the emerging markets. They are still less important for traders than advanced countries. Gold is mainly a bet against the US dollar, so it reacts strongly to the developments in the US or its main peers, such as the European Union or Japan, but shrugs off what is happening in Russia or Brazil.
The best example may be 2018. The Turkish lira and the Argentina’s peso lost about one third and about half of their respective values against the greenback from January to August. In the same period, which witnessed the turmoil in several emerging markets, the price of gold declined by about 8 percent, as one can see in the chart below.
Chart 1: Gold prices (London P.M. Fix, in $) from January to August 2018.
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