GMO notes the strong pro-cyclical connection between Emerging Market (EM) consumers and Gold Demand. EM made up over 75% of gold demand from 2000-2010 during the period of economic growth … now with the Indian Rupee at multi-year lows and a new 8% tax on gold imported to India (the government is struggling to reduce it’s current account deficit in the only way it thinks it can) could the largest buyer of gold in the world (Indian consumers) slow down meaningfully?
The concept of gold as a general insurance policy against systemic risks is dangerous, especially today. Gold prices are driven both by global monetary policy and emerging markets consumers. Emerging markets have been a significant positive force on gold prices for such a long time that it’s easy to forget that their impact on gold can very well go in both directions. Gold prices not only have extensive exposure to China and India, but their exposure to these countries is pro-cyclical by nature. Given both the cyclical and structural challenges the Chinese and Indian economies are facing, we believe the risks to gold prices today are particularly high.