Emerging Market Strength & Gold

There have been two recent articles that caught our eye in respect of longer term trends with implications for gold.  Regular readers will know our thoughts on the dangers inherent in the US sharemarket.  Last week we shared the thoughts and graph of Mark Yusko calling a “massive” crash in the US.  This week we saw Paul Singer (head of the $31b Elliott Management hedge fund) say:

“I am very concerned about where we are…..What we have today is a global financial system that’s just about as leveraged - and in many cases more leveraged - than before 2008, and I don’t think the financial system is more sound.....I don’t think that the fixes that have been put into place have actually created a sound financial system. I don’t believe that confidence is justified in policy makers and central bankers…..If and when confidence is lost, it could be lost in a very abrupt fashion causing conceivably a ruckus in bond markets, stock markets and in financial institutions.” Read here for his warnings last year.

However…. Yusko just came out stating whilst he thinks the US is in trouble he thinks Emerging Markets (EMs) are a buy.  Yusko puts the US’s issues down to the 3 D’s:

1) too much debt, 2) bad demographics, and 3) deflation.  He says:

“GDP [economic] growth is much, much better in emerging markets than developed markets.

The Killer Ds are what’s going to hurt the developed world over the next decade. That’s debt. That’s bad demographics. And that’s deflation.

You got the exact opposite in emerging markets. You have very low debt. You have very good, strong demographics. A lot of young people to buy stuff. And on top of it, you don’t have the deflation problem. You actually have inflation.”

The key EM’s are of course the BRICs - Brazil, Russia, India, and China and he also highlights Poland and Columbia as a couple of favourites along with India.  He is suggesting moving your share portfolio to play in these emerging economies.  

The other article that caught our attention is a release by the World Gold Council yesterday reporting on the tax overhaul in India where “On 1st July, India’s labyrinth of taxes will be replaced with a simple, nationwide Goods & Services Tax (GST). While this radical step forward could present short-term challenges, we believe it will make the gold industry more transparent and efficient, benefiting the gold industry and gold buyers.”

If Yusko (and he’s certainly not alone) is correct, this resurgence of EM’s should also be positive for gold as you will note a few of the world’s biggest gold consumers in the above list, particularly China and India, reinforced further by the WGC report yesterday.  Already this year Indian gold demand is up strongly and China remains strong whilst the Russian’s keep adding large amounts to their reserves.  China and India alone, the world’s 2 most populous, account for a huge proportion of global demand.  More prosperity and inflation would almost certainly see more gold demand.