Aug 2018
Aug 2018
Monetary crisis in emerging markets and the roles of gold
By StoneX Bullion
Similar problems are faced by more emerging markets like Iran and Argentina as the US dollar appreciates, and the most frequent causes include inappropriate monetary policy, problematic economic mode, fiscal weakness and psychological factors, while it is too early to say certain systematic risks existing in emerging markets.
The economic growth of Turkey is mainly driven by investment in real estate and constructional projects. The easing monetary policy used to keep the economy growing. However, when there is a rise of interest rate in the US and strengthening of US dollar, losing control of inflation and currency depreciation can occur with the absence of a tightening monetary policy. In addition, the economy is at high risk of slowing down.
Lack of foreign reserves is one of the common reasons for the situation in Turkey and Argentina. They both have long-term trade deficit in the current accounts and high debts mostly denominated in US dollar, which weaken the local currency. In Argentina, for instance, the foreign reserve is only one quarter of its external debt, resulting in constant borrowing to serve debt. Once capital outflows occur in the market, people largely exchange local currencies for gold or hard currency along with the local currencies losing value. Furthermore, lacing confidence in the central banks can worsen the situation with larger scale of panic buying.
The gold reserve is often used for hedging against inflation, weak currencies and economic volatility as it’s seen as a durable storage of value. Facts and statistics show the rising desire of both public and central banks in investing in gold. Although weakening currencies have pushed local gold prices to a record high by 500% in Argentine Peso,230% Iranian Rial and 160% in Turkish Lira in the last 5 years. (Compared with the exchange rate with US dollar growth 426%, 40% and 200% respectively) Turkey’s demand for gold had surged by one third in the first quarter this year than that of 2017; at the same time, Turkey’s central bank has also been aggressively buying gold with its holding almost doubled, being the second largest net gold buyer among central banks; the consumption of gold in Iran has surged significantly since 2017, surpassing that of Saudi Arabia; similarly, Argentines are buying gold more than ever to protect their savings.
Reference
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