In a recent IMF research study, economists argued that the world is on less stable ground. The interesting reason for a discussion of the study is that the authors, Ghada Fayad and Roberto Perrelli, did not mention European debt or the American consumer, but instead claimed that the culprit behind weak growth is emerging market economies.
The following graphic is a look at economic growth divided into two groups - the IMF's classification of emerging economies and advanced economies.
According to the IMF economists, some of the levers behind the "weakness" in emerging economies include a high reliance on commodities, weakness in certain trading partners, fiscal balance sheets prior to the recession, exchange rate regimes, and geographic factors.
With the multitude of factors as the backdrop, what does emerging market weakening mean for the gold market?
On the surface, the emerging markets situation has are two main forces pulling the price of gold in opposite directions.
On the one hand, slower emerging market growth may put downward pressure on demand for physical gold.
On the other hand, slower emerging market growth places the global economy on weaker footing, increasing the risk premium in the price of gold.
Which force will win out?
Well, without guessing at the causes behind future gold price moves, if one looks at the history of the price of gold against recent behavioural performance, it certainly looks as though the price of gold is due for some strong performance. This could be due to IMFforecasts being wrong or perhaps the global economy really is on weak footing.
In dark blue are the 20 years from 1993 to 2013. In light blue are the 5 years prior to the financial crisis (2003-2008). In dark red are the 3 three years following the financial crisis (2010-2013). In light red are the IMF projections from 2014 to 2018.
Interestingly, the IMF sees continuing weakness in the emerging economies (left graph) as opposed to advanced economies (right graph).
Overall, the IMF projects emerging market growth to drop from about 6.5% annualised growth prior to the financial recession to about 5% from 2014 to 2018.
In contrast to the emerging markets story, the IMF projects that advanced economies will climb back to the levels that existed prior to the financial crisis.
What is behind the emerging markets slowdown? What does it mean for the gold market?
