The recently published gold bullion import total for May, of under 10t [tons], highlights some of the challenges facing the Turkish gold market. This, however, was not the only sign of a sharp drop in gold demand. The latest data from the Turkish State Mint (Darphane) reveals that coin minting for January to May fell by around 60%. In addition, gold held in deposit accounts by Turkish commercial banks has slumped to levels last seen in 2011. In spite of the market’s current difficulties Turkey still retains a positive outlook, although much will depend on the fate of the Turkish lira (TL).
The issues confronting Turkey’ gold industry owe much to the collapse of the TL. Although the currency’s decline can be traced back over two years, it has been the sharp fall since last November that has led to the current weakness in the local gold market. The key reason for this has been the deepening political crisis that has beset Turkey, with a growing split between the president and the governor of the central bank (effectively called a traitor for his interest rate policy). As a result, since early November the depreciation of the TL has accelerated. This in turn has seen domestic gold prices surge, by around 25%, against a 4% rise in dollar gold. Perhaps unsurprisingly, Turkish consumers have taken the opportunity to liquidate some of their gold holdings.
One outcome of this has been a surge in Turkish gold recycling, much of which has been exported. Moreover, bullion imports have fallen sharply so far this year, by around 40% over the first five months. This decline, in isolation, does not say much about the state of Turkish demand, as the aforementioned increase in recycling has substituted for imported gold in meeting the country’s gold requirements.
However, there have been clear indications that Turkish physical demand has weakened appreciably this year, in particular investment demand. In fact, we have already seen a sharp drop in Q1.15, with combined gold coin and bar demand falling by close to 60% yoy. However, the weakness has continued into Q2. As a result, coin minting over January to May this year stands at around 8t, compared with a little over 17t a year ago.
Other gold investment vehicles in Turkey have also suffered. In particular, gold deposit accounts, run by the country’s commercial banks, have seen their gold holdings fall sharply. At end-April (the latest available data), an estimated 105t was held in these accounts. At their height, in June 2013, these holdings stood at around 260t.
Staying on the theme of gold deposits, as we have noted in past reports, the number of banks offering such products has grown tremendously over the past few years, with some even offering interest-bearing accounts. Another development has seen the commercial banks introduce gold buying days where scrap gold brought in by the public could be credited against a gold deposit account. In spite of this, the scrap that has been generated in recent months has overwhelmingly been sold for cash. In other words, consumers have responded to near record high local gold prices by liquidating a portion of their holdings. (To put the recent price trend into perspective, they are only 5% below late 2011 levels, when dollar gold reached $1,900.)
In our view, recent events should not be construed as a negative for the Turkish gold market, even though it has comfortably become a net supplier to the international market. Recent developments owe much to the jump in local gold prices against a backdrop of rising political uncertainty. Consumers have simply taken advantage of the situation to realise a monetary gain. In other words, in a traditionally price sensitive market, gold is behaving as one would expect. The corollary of this is that, if the crisis dissipates (and there should be greater clarity following this weekend’s parliamentary elections), the impact this has on the TL should see local gold prices fall appreciably. This in turn should present a strong buying signal, to the benefit of Turkish gold investment demand.
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