This article talks about using the level of
gold imports as an indicator of strength for emerging markets. When the amount
of gold demanded in a market rises, it signifies lost faith that the local market’s
currency’s ability to hold value, or that the local economy is going to
experience growth. In India, however,
the latter is not likely. Growth has fallen to 4.5%, nearly half the level it
endured during its early days as a member of BRICS. This combined with a major
rise in the level of gold imports could mean problems for India. The level of
gold imports rose so fast last year that India had to impose new taxes on gold
in order to slow demand. High levels of gold imports lead to high levels of
inflation expectation, as seen in the graph in the article, which in turn leads
to an increase in interest rates and a decrease in investment. The central bank
has already begun increasing interest rates. Analysts at the Institute of International
say growth may increase to 6% or more this year. If not, however, India’s
economy could be in some serious trouble.
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/21/for-a-glimpse-at-emerging-market-problems-follow-the-gold/?wprss=rss_business&clsrd
I have to disagree with you because the article clearly states that "two-thirds of the slowdown can be explained by domestic factors, including supply bottlenecks, delayed project approval and implementation, and heightened policy uncertainty." Therefore, the rise in demand for gold could mean that India's economy will experience growth.
ReplyDeleteI'm not sure how valid it is to compare the trends of inflation and imports of gold to the country of India. India, for many years, has been the largest importer for gold- until recently, where China has jumped ahead. There has been a history of gold imports for financial backing, collateral, industry; mostly to get around the financial system. It is also a way for Indians to store wealth without paying taxes.
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