Turkey Has No Cure for a Gold Craze That Leaves Lira Vulnerable

(Bloomberg) -- A year of crisis for the lira has kept Turks buying gold at a record pace. Now the appetite for more bullion risks becoming a drag on the currency just as a rally struggles to regain momentum.

In the two weeks after President Recep Tayyip Erdogan cleared out the leadership ranks blamed for failing to stabilize the lira and draining reserves, Turkish retail investors and firms added $2.2 billion to their gold holdings, taking them to $36.4 billion, or almost triple the total last year, central bank data showed.

Turks aren’t relenting in their zeal to own gold despite a historic turnaround in the lira and this month’s decline in bullion prices. But with gold imports now accounting for most of the current-account deficit, the purchases are getting in the way of mending Turkey’s external imbalances even as authorities increasingly adopt the market-friendly approach that foreign investors crave.

“We see steady demand from local investors for gold even at higher than world prices -- unattractive deposit rates and the lack of trust in the lira are the main reasons driving the demand,” said Dogukan Cicek, business development executive at Troy Precious Metals in Istanbul. “A retreat in global gold prices is also seen as an opportunity for those who think gold’s story is far from being over.”

Turkey is one of the biggest consumers of the precious metal worldwide. Turks use gold as protection during times of currency devaluation and inflation and traditionally gift it for events from weddings to circumcision ceremonies.

Domestic buyers are piling into gold in tandem with greater purchases of foreign exchange. Deposits in hard currencies rose $34.5 billion to a record $228.2 billion this year. Locals also added $3.94 billion to their foreign-exchange FX savings in the two weeks through Nov. 20.

Gold Fixation

When it comes to gold, local habits are proving hard to break even after the lira soared more than 10% in the week following the ouster of the central bank governor and the resignation of Erdogan’s son-in-law as finance minister. The currency has grown less steady in recent days, however, even after the central bank raised interest rates by the most in over two years and took other measures to cool a lending boom.

Turkey’s currency has lost 25% this year, making it the second-worst performer in emerging markets after the Argentinian peso. While gold slipped in November after dropping for three straight months, it’s still up about 19% this year after reaching a record in August.

Combined with declines in the lira, the precious metal provided better returns for local investors than bonds or Turkey’s benchmark index of stocks.

Regular Turks aren’t alone in finding solace in bullion. The central bank is also continuing to accumulate gold reserves, bringing its holdings to an all-time high last month. Turkey’s gold imports are on track for the most since 2017, according to Borsa Istanbul data.

Given that foreign investors remain wary of Turkish assets, the challenge for Erdogan and his new economy team is to wean people off gold in the hope of inspiring enough confidence in the lira.

“Demanding gold means demanding FX to buy it,” said Evren Kirikoglu, an independent market strategist in Istanbul. “It’s one of the obstacles ahead for the lira’s appreciation.”

©2020 Bloomberg L.P.