Talking Turkey on Gold

Economic & political worries means Turkey is selling, not buying gold, before this weekend's election...

IMAGINE that your country goes to the polls this Sunday..

The ruling conservative party...increasingly right-wing and authoritarian...looks likely to win, but perhaps not with the majority needed for the President to then extend his powers...as he wishes...by bulldozing the constitution.

Refugees are meantime pouring across your eastern border to flee Islamic fanatics slaughtering or enslaving pretty much everyone they conquer. Inflation has risen above 8% per year, but the President and his party leaders have effectively blocked rising interest rates...accusing the central bank governor of treason for the little hikes already made. 

The stock market has dropped 10% from New Year, and your currency has sunk near fresh record lows against both the Euro and against the Dollar. That has helped the price of gold – a small but notable part of every day finance in your country – surge within 5% of its 2011 record highs. 

Like you, everyone would be buying gold, right? But not in Turkey. 

The world's fourth largest gold-buying nation, Turkey already slipped during the first quarter of 2015 to 9th place for jewellery and 11th for small bars and coin according to the World Gold Council's Q1 demand trends report. This week's new import and export data now show Turkey "comfortably" becoming a net supplier to the international market, as consultancy Metals Focus note in their weekly update.

Indeed, gold coin production...formerly the world's No.1 ahead of even China...has slumped 60% so far in 2015 compared with the same period last year on the giant Darphane mint's data. 

Why? 

Besides some structural changes to the local gold market (notably last year's near-ban on buying with credit cards...since eased only a little), "The Turkish market [remains] highly price sensitive," explain analysts at Thomson Reuters GFMS. And right now, "the majority of people are not very hopeful of the future," explains Metals Focus.

So unlike Western investors chasing assets higher, Turkish consumers buy dips in gold, and sell spikes. They also stop buying...and start selling...when things get tough. 

This smart trading behaviour marks what Frank Holmes at US Global Investors has called the 'love trade' amongst Middle Eastern and Asian households. It makes a handy counterbalance to the 'fear trade' which tends to drive Western households' investment demand. 

That perhaps over-simplifies the blur between jewellery and investment demand worldwide. But bottom line, and with global gold demand now softening into the usual summer lull across Asia – especially in world No.1 consumer India, where this year's Hindu calendar may see fewer weddings overall – the fact is that gold prices are in truth holding up pretty well right now.

Add the continued drip-drip of metal out of ETF trust funds traded on Western stock markets...plus news of the weakest sales in 3 years from Australia's giant Perth Mint...and you might wonder who is buying at these multi-month lows in Dollar, Sterling and Euro terms.

BullionVault users is the answer, both larger and smaller. As a group, client holdings at the internet's No.1 precious metals exchange have now swollen at the fastest pace since the turn of 2012-13. With fresh deliveries coming Friday to re-stock our trading float, the Daily Audit on Monday will show a new record total above 34 tonnes. 

Fear, love or bargain-hunting? All three from talking to clients this week. Prices are low. Other asset classes have been delivering strong gains. The fear is those two facts might not stay true for much longer.

"Given all the uncertainties," writes a bullion trading desk in London, pointing to the "bond sell off, USD and equity oscillations, Draghi telling markets to get used to volatility while IMF warning US not to raise rates...one would think the VIX Index [of volatility in US equity option contracts] would be sharply higher.

"Yet it remains largely unchanged." Because money managers and bank traders remain, bizarrely, unconcerned. Not even the revived Greek debt crisis...surely now coming to a head at last after 5 long years...has spooked the relative calm. Not yet.

Back across the border in Turkey meantime, households owning gold "have simply taken advantage of the situation to realise a monetary gain," says Metals Focus. Meaning that "in a traditionally price sensitive market, gold is behaving as one would expect."

The flip-side of this, they reckon, is that an easing of Turkey's political and economic worries will likely see private gold demand return as the Lira recovers on the FX market. Maybe a bigger vote for the AKP would deliver it, as one precious metals professional tells TheBullionDesk. Or perhaps a coalition government, adding secular moderates to the mix would be better, according to Metals Focus's Turkey analyst in Istanbul.

All eyes on Sunday's result then. Squaring how Western analysts and investors see gold with how the world's 4th heaviest buyers view it, however, may take longer.