Chapter 4 - Investment

Introduction

Turkey has a long-standing tradition of striking coins, dating back around 2,500 years. In the present day, the Turkish State Mint (known as Darphane) produces legal tender Cumhuriyet Altını (Republic Coins, made up of Ziynet and Ata versions with the same fineness, but different designs and slightly different weights). In addition, refineries and other producers manufacture small bars and coins. These products are then distributed across approximately 35,000 retail jewellers and also through online channels.

The Republic coins are all 22k (0.916 milyem), while private label bars and coins are mostly 24k (0.995 and 0.9999 milyem), with a small quantity of 22k coins. Both Republic and private label coins attract extremely thin margins. At the retail level, the typical gross profit margin on Republic coins is between 2% and 3.5%, depending on the retailer and the size of the coin (the most is a quarter weighing 1.754g and 1.804g depending on whether it is a Ziynet or an Ata coin respectively), while the labour charge for comparable private label small bars and coins typically ranges between 4%-5% (as they all come packaged). For heavier sizes, the margins can fall to as low as 2.5%.

Having this much exposure to gold, it is not surprising that physical investment is extremely popular in Turkey. However, investor motives for change according to market conditions, expectations for the Turkish lira gold price, and other anticipated investor returns, such as real estate and stocks. Two periods stand out, which highlight markedly contrasting performances of coin and bar demand. Looking first at 2015 this witnessed a collapse of the lira, which led to a bout of sustained weakness in the local gold market. The political crisis back then had seen domestic gold prices surge, by around 25% within six months, against a 4% rise in dollar gold.

This afforded consumers the opportunity to liquidate some of their gold holdings, resulting in physical investment for the year slumping to 23t, the lowest total in Metals Focus’ series (which dates from 2010).

Fast forward to 2020, and Turkish physical investment touched an all- time high of 121t amid rising lira gold prices. The initial motive behind last year’s strong appetite for gold (and silver) was the lira’s weakness against the dollar, which in turn was fuelled by a flight to quality as the pandemic spread. The impact of this was exacerbated by the backdrop of almost one year of negative real interest rates in Turkey. As the dollar gold price started to advance, investors increasingly looked to buy physical gold (and, to a lesser extent, silver) to help preserve their savings against a sharply weaker lira, and also to profit from the gold rally. Another factor behind the strength in physical investment was the cheap credit scheme offered by state banks to combat income loss suffered by the public and businesses.