Gold in Turkey

As Turkey struggles with runaway currency devaluation and astronomical inflation, the country is seeing record levels of gold smuggling as citizens’ desperate demand drives local precious metals premiums through the roof.

“Turkey is witnessing a significant increase in gold smuggling, with security forces seizing about 350 kilograms of smuggled gold at border crossings so far this year,” wrote Mackenzie Crow in an article published Thursday. “This figure already surpasses 60% of the total gold seized in the entirety of 2023. A notable incident involved the discovery of 88 kilograms of gold bars, valued over $6 million, hidden under the car seats in the eastern province of Van, near the Iranian border.”

The extreme demand for the precious metal has resulted in a price premium that is 7% above international spot prices, or $5,000 per kilogram, which Crow said is drawing in individuals looking to make a quick profit, as well as organized crime.

“The underlying cause of the smuggling surge is a significant premium on gold within Turkey, driven by a combination of high retail demand and a state-imposed cap on gold imports,” he said. While Turks, like the citizens of most countries, have always relied on gold as a stable store of value in times of economic instability, the current period of rapidly devaluing currency and ever-increasing price inflation has pushed gold demand far beyond anything the country has seen in recent history.
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Turkey's central bank is opting for a different monetary tightening method as it grapples with climbing inflation, after previously signaling that its rate-hiking cycle was over.

The institution sent a directive to lenders, effective Friday, instructing them to put parts of their required lira reserves into blocked accounts.

That's pushed loan rates up higher and cut the sizes of some banks' loan limits, with some lenders shrinking their commercial loan limits to 100,000 lira, or $3,100, Reuters reported Thursday.

"Some banks have stopped lending. Some banks even recall their already granted loans. This is going to cause further liquidity squeeze," Arda Tunca, an Istanbul-based economist at PolitikYol, told CNBC.
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Turkish annual consumer price inflation soared to 67.07% in February. The strong figures have fueled concerns that Turkey's central bank, which had indicated last month that its painful eight-month-long rate-hiking cycle was over, may have to return to tightening.

"Pressures on Turkish policymakers are building ahead of the local elections on 31st March as capital inflows have slowed and FX reserves are falling again," Capital Economics wrote. ...

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Turkey's annual inflation rose to 68.5% for the month of March, an increase on February's 67.1% inflation read, according to the Turkish Statistical Institute's report released Wednesday.
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Much of the inflation in recent months stems from a significant increase to the minimum wage that Turkey's government mandated for 2024. The minimum wage for the year rose to 17,002 Turkish lira (around $530) per month in January, a 100% hike from the same period a year prior.
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Analysts note that with Turkey's local elections, which took place on March 31, out of the way, pushing ahead with tighter monetary policy will likely be easier. The vote for municipal leaders across the country, which took place Sunday, saw Turkey's opposition party deal a historic blow to Turkish President Recep Tayyip Erdogan's ruling AK Party, winning the country's five largest cities and several rural areas as well.

Economic pain and steep living cost increases for ordinary Turks over the last several years played a major role in the results, political observers said.

Exercising tight control over the central bank, Erdogan for the last few years refused to raise rates, calling them "the mother of all evil" and insisting, against economic orthodoxy, that lowering rates was the way to cool inflation. This was despite declining foreign currency reserves and a rapidly weakening Turkish lira, which has lost some 82% of its value against the dollar in the last five years.

Only after appointing a new finance and central bank team in May 2023 did the central bank stage a turnaround in policy, suggesting greater independence at the bank from the executive branch of Turkey's government. But the political loss for Erdogan's party in the March local elections could make his future moves more unpredictable, some analysts say.
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