Turkey's Financial Crisis Rocks the Gold Market

Amid Turkey's ongoing economic challenges marked by currency devaluation and soaring inflation rates, there has been a notable surge in gold smuggling. This surge can be attributed to the heightened demand for precious metals among citizens, leading to record levels of local gold premiums.

According to a recent article by Mackenzie Crow, gold smuggling in Turkey has seen a significant uptick, with authorities seizing approximately 350 kilograms of smuggled gold at border checkpoints this year alone. This figure already surpasses 60% of the total gold seized in the entirety of the previous year. One notable incident involved the discovery of 88 kilograms of gold bars, valued at over $6 million, concealed under car seats in the eastern province of Van, near the Iranian border.

The intense demand for gold has resulted in a price premium of 7% above international spot prices, equating to roughly $5,000 per kilogram. This premium has attracted individuals seeking quick profits as well as organized crime syndicates.

The root cause of this surge in smuggling can be traced to the significant premium on gold within Turkey, driven by both high retail demand and government-imposed restrictions on gold imports. While gold has historically served as a stable store of value during economic instability, the current period of currency devaluation and rampant inflation has led to unprecedented demand for the precious metal.

President Recep Tayyip Erdogan's attempts to regulate the gold market have inadvertently exacerbated the issue. Government quotas on bullion imports, aimed at reducing the current account deficit, have further tightened the supply, driving local premiums even higher.

To meet the escalating demand, Turkey's State Mint, responsible for producing standardized "Republic Gold" coins, has increased production by working double shifts seven days a week. However, even with this increased domestic production, the demand still outstrips the available supply.

According to Mehmet Ali Yildirimturk, Vice-President of the Istanbul Jewelers, Goldsmiths, and Moneychangers Association, sellers are now scarce due to overwhelming demand from small-scale buyers, leading to explosive price increases.

The challenge persists as government restrictions continue to hamper gold imports despite soaring domestic demand, highlighting the difficulty in managing demand for gold as a traditional safe-haven asset amidst economic instability.

As the Turkish government grapples with economic uncertainties, it's unsurprising that citizens are seeking alternatives to safeguard their wealth against currency depreciation.