(Kitco News) – 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.
And the solution that President Recep Tayyip Erdogan has attempted to target the gold market with has become a big part of the problem.
“The government's quota system for bullion imports, aimed at narrowing the current account deficit, has further exacerbated the supply squeeze, pushing local premiums higher,” Crow wrote. “Despite these restrictions, demand remains strong, fueled by negative real interest rates, persistent inflation, and political uncertainty.”
To attempt to meet the soaring demand of its citizenry, Turkey’s mint has been working overtime to ramp up its regular production.
“The Turkish State Mint that has a monopoly on the production of standardized ‘Republic Gold’ coins is working double shifts through to 1 a.m. seven days a week to meet citizens’ demand,” said Mehmet Hekim, the Mint’s Deputy General Director. “It’s almost doubled its daily output in recent weeks to 700-800 kilograms as of Wednesday.”
But according to Mehmet Ali Yildirimturk, Vice-President of the Istanbul Jewelers, Goldsmiths, and Moneychangers Association, even this ramped-up domestic production can’t meet local demand.
“These days there are almost no sellers,” Yildirimturk told Crow. “When there’s lots of these small-scale buyers it creates demand and the price explodes.”
The issue is that this burgeoning demand cannot be satisfied when the government is also restricting importation.
“Turkey's gold imports have slumped for the fourth consecutive month due to government restrictions, despite domestic demand soaring, as reflected in the disparity between local and international gold prices,” the article noted. “The ongoing monetary policy tightening and the state-imposed quota on gold imports are attempts to stabilize the economy, but they also highlight the challenges of managing demand for gold as a traditional safe-haven asset.”
As the Turkish government continues to ‘manage’ the Lira and the broader economy into oblivion, it should come as no surprise that Turkish citizens will scramble to circumvent that government in order to get their hands on an asset that will still be valuable next week, next month, and next year.