The Turkish lira crisis, which has been depreciating over the past year, has pushed citizens of the Ottoman country to buy gold at a record rate. Now, their high appetite for this metal is threatening the national currency even more. And this is why.

Two weeks after the clean-up by the country’s President Recep Tayyip Erdogan, in the ranks of officials accused of not stabilizing the lira, Turkish retail investors and companies increased the value of their gold reserves by $ 2.2 billion to $ 36.4 billion. 

This alarming tripling compared to the total for 2019 represents a great challenge for the president and his new team, which seeks to do everything possible to improve the country’s economic situation. 

In particular, this trend threatens a further depreciation of the lira, the Istanbul-based independent analyst Evren Kirikoglu warned in conversation with the Bloomberg agency. According to the expert, higher demand for gold leads to a higher demand for foreign currencies used to buy it. “It is one of the obstacles to the appreciation of the lira,” he explained.

Turkish investors accumulate gold reserves while accumulating foreign exchange. Its stable coin deposits added $ 34.5 billion in value to a record $ 228.2 billion so far this year. Furthermore, the value of his savings in foreign currency had increased by $ 3.94 billion in the two weeks leading up to November 20.

In 2020, the lira has lost 25% of its value and has become the second national currency to show the worst performance in emerging markets, only behind the Argentine peso. 

Another disadvantage that this high appetite for gold has brought is that it has boosted imports, which have been on the rise since 2017. Now, gold purchases abroad are increasing Turkey’s current account deficit. As a consequence, each new acquisition of this metal from another country becomes an obstacle to correcting imbalances in trade.

Why demand is not going down?

Although gold prices have been declining since August, the demand for this metal shown by local investors is still high enough. Thus, despite this prolonged decline, gold is still 19% above its value in 2019. 

Furthermore, Turkish citizens have not been the only ones to buy bullion. The central bank of the Ottoman country also continues to accumulate gold reserves, which reached an all-time high in October.

And in this trend there is no surprise, as in light of the consequent depreciation of the lira, investments in gold provided better returns than bonds or stocks in Turkey.

The constant demand for gold is due to a number of factors including unattractive deposit rates and a lack of confidence in the lira, explained Dogukan Cicek, one of the directors of the company Troy Precious Metals. 

“A decline in world prices is also seen as an opportunity for those who think that the history of gold is far from over,” said the expert.