Chapter 1 - Introduction

Introduction

Turkey is home to one of the world’s most vibrant gold markets. In terms of the key headlines, the country’s central bank – Central Bank of the Republic of Turkey (CBRT) – has become increasingly active in the gold market over the past decade or so. This started in 2013 with the introduction of the Reserve Option Mechanism (ROM), which has helped Turkish commercial banks to free up lira liquidity. In 2017, the CBRT then started to buy gold and added a net 325t through to July 2020. After its own gold reserves peaked at 441t, the CBRT embarked on a series of disposals worth 106t in Borsa Istanbul (BIST) between August-December in 2020.

Much of the gold acquired by the CBRT has been imported, which helps explain the elevated level of bullion imports, culminating in last year’s record high of over 500t. This gold was brought in through BIST, which serves as the gatekeeper for precious metal imports. Launched in 1993 as the Istanbul Gold Exchange, it merged in 2005 with the Istanbul Stock Exchange to create BIST. The Borsa’s remit now extends to ensuring imported gold meets the newly introduced chain of custody legislation.

The infrastructure supporting the Turkish gold market extends well beyond BIST. Of note is the Kuyumcukent industrial complex, which was opened in 2006. Sitting on the outskirts of Istanbul (near the old Atatürk airport), this was partly designed to relocate the trade away from, and so help preserve, the Old City. Its tenants now include all aspects of the supply chain, including one of Turkey’s two GDL refineries. The complex is a high-profile example of the long-standing support provided by the Turkish authorities to its gold market.

This infrastructure has also helped Turkey to develop its jewellery export business, at a time when a struggling economy and exceptionally strong lira gold prices have weighed on the domestic jewellery market. As a result, Turkey is now an established top-10 gold jewellery exporter, which accounts for local jewellery manufacturing comfortably outperforming Turkish jewellery consumption.

Even though retail purchases have weakened in recent years, the country has still built up a sizeable above-ground stock of gold jewellery. Known locally as ‘under the pillow’ gold, this could exceed 3,500t. Over the years, the government has attempted to monetise this gold to help reduce bullion imports and, in turn, benefit the current account deficit. As a result, the authorities introduced a gold monetisation scheme. Although this achieved only modest results, it reached two outcomes. First, it helped to galvanise gold banking in Turkey, paving the way for a raft of gold-related banking products. Second, it acted as a template for other monetisation schemes, notably in India.

Less visible, but still extremely important to the inner workings of the country’s gold market is the gold accounting system adopted during the early 1970s. First introduced to contend with the effects of rampant inflation, it uses the Milyem system to convert all transactions into units of gold. This helps explain why many family-owned retail jewellers (who dominate the retail landscape) still measure their success by how many kilos of gold they own at year-end. It is also testament to how traditional and more modern principals work together in the Turkish gold market.