Turkey: Driving Demand With Innovation

Gold is a common part of Turkish culture and is often given for special occasions such as births and weddings. It is also a highly trusted means of saving. Turkey is no stranger to inflation, and many people prefer storing their wealth in real estate or the yellow metal as opposed to banks.

In 2011, Turkey’s savings rate dropped to the lowest level in the world for any economy larger than $100 billion – other than Greece, Portugal, and Ireland.

But even as the lira tumbled almost 20 percent against the dollar, the Wall Street Journal said demand for coins and bars rose 99 percent.

The Istanbul Gold Refinery estimates that individuals have about 5,000 tons of gold valued at $270 billion stashed away. These “under-the-pillow” savings mean that there is a massive amount of wealth within Turkish borders that does nothing to benefit the overall economy. Yet the government is struggling to manage a deepening current account deficit.

Turkish officials want to channel the nation’s gold investments in a manner that will benefit the economy. One way that they are doing this is by encouraging the build up of gold reserves to increase liquidity by freeing up cash.

Last year, Turkey’s central bank announced that 10 percent of a bank’s reserve requirements for foreign currency liabilities can be maintained in gold. Later, the central bank allowed a further 10 percent of the reserve requirements for Turkish lira liabilities to be maintained in gold.

The government’s goals are coupled with a growing Turkish trend known as gold banking.

Gold banking

Traditionally, there were two ways to invest in the metal – jewelry and coins – and women were the primary investors. Now an array of new investment products is making gold appeal to a wider market.

Atasay, one of Turkey’s top jewelers, has reportedly agreed to venture into this innovative realm of gold banking with two of the nation’s largest banks. Atasay’s role is to collect gold from the public. Under this system individuals can report to a jewelry store, exchange gold jewelry for a certificate, and then to take that certificate to a bank to have the equivalent amount of Turkish lira deposited.

Another bank, Kuveyt Turk, part of the Kuwait Finance House group, is aiming to be a leader in this sector and thus offers a wide array of gold products.

Gold deposit accounts, for example, allow people to buy and sell small amounts of gold through the banking system. The minimum transaction is 0.01 grams. When ready, clients have a number of options for redemption, including transferring value to a lira account, withdrawing bullion, and drawing a Gold Cheque.

Gold-to-Gold participation accounts can be opened with as few as 10 grams of gold. The client then chooses a maturity period of three months, six months, or one year. Over the chosen time period the metal is “put to good use in the real sector.” Upon maturity, there is an 85/15 split of the profits and the gold principal is returned to the account holder, who also receives the larger share of the profits paid out in gold.

Another product, Gold-Indexed Finance, is a funding option for individuals and companies that work with the metal. It allows them to obtain credit and repay the debt in installments of gold or the cash equivalent of the required amount of gold at the metal’s current rate on the due date.

But the gold ATM may be one of the bank’s most innovative ideas. Kuveyt Turk is credited as the first bank in the world to offer individuals the opportunity to purchase gold bullion at their convenience from a machine.

The WGC described this initiative as a new and exciting trend that will be followed more closely as it gains universal acceptance.

Turkey’s central bank has also been active in the market. In 2011, the institution increased its gold reserves by 79 tonnes, bringing its total official holdings to 195.3 tonnes. This year, the bank has continued bolstering its reserves with official holdings, and has increased them to 209.6 tonnes as of the end of March.

The WGC expects developments in the gold industry to have positive long-term implications for the market. The initiatives by government and commercial banks are thought to support expectations of strong potential growth in investment demand.

Kuveyt Turk also has a positive outlook, estimating that government and private entities will sell 11.5 million units of bullion in 2012, as opposed to the 10.7 million sold last year.

Turkey’s domestic supply

Though Turkey has a penchant for gold, the nation has seen sharp declines in domestic supply in recent years. Total domestic supply peaked in 2009 at 231.8 tonnes, according to the World Gold Council. Though mine supply has continued to increase, total supply in 2011 declined to 98.6 tonnes due to the sharp reduction in recycled supply.

This development could be positive for gold producers elsewhere. The WGC said Turkey may need to increase imports to meet further recovery in Turkish gold demand and declining recycled gold flows.

Securities Disclosure: I, Michelle Smith, do not hold equity interest in any companies mentioned in this article.