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Gold Investing in Turkey

Written By Geoffrey Pike

Posted May 14, 2015

turkeygoldAccording to recent data, gold imports into Turkey during April fell over 50% from April of last year. The country’s imports were just over 2 tons in the latest month, compared to over 4 tons in April 2014.

There is obviously a falling demand for the yellow metal in Turkey, which is one of the richer countries in the region with a population of over 75 million people. Sluggish economies seem to be a global theme these days and Turkey is no exception.

This probably is not well known, even amongst gold bugs, but Turkey is actually the fourth largest consumer of gold in the world. The people of the country contribute to nearly 6% of global demand for gold.

It is no surprise that China and India, by far the two most populous countries, are first and second in gold consumption. While Indians typically buy gold for jewelry and perhaps as a vehicle for savings, the Chinese also use gold for manufacturing. The U.S. is third in gold consumption.

We don’t know yet if gold demand in Turkey will stay down for a while or if this is just a blip. It’s certainly not a big player to the extent of India or China, but it’s still significant.

So far, this has not really affected the price of gold, or if it has, there have been other factors driving it up and offsetting the decreased demand in Turkey. Overall, the demand for gold coming out of Turkey is probably very marginal in terms of driving prices.

Perhaps the biggest question is whether falling demand for gold will be limited to Turkey and a few other areas, or if the rest of the world is going to follow.

Recessions and Gold

The unemployment rate in Turkey recently hit a 5-year high, going above 11 percent. When people are out of work and there are recessionary conditions, this typically drives people into cash or cash equivalents – but not always.

When the U.S. economy tanked in 2008, gold went down, although not as much as stocks. It didn’t stay down for that long, but you could really say the same thing about stocks.

Gold is not usually a good recession hedge because the demand for money usually goes up. Cash is king. The exception to this rule is when there is a lack of trust in the currency, which can be a contributing factor to the bad economic times.

The best example of this is the 1970s in the United States. It basically disproved Keynesianism, although people still hang on to the theory. The U.S. had high price inflation (double digits), along with high interest rates, high unemployment, and recessionary conditions.

The 1970s proved that the central bank can keep inflating and it won’t necessarily “cure” a recession. In this case, it wasn’t even enough to cover it over for a while.

As a result, precious metals – gold in particular – did quite well in the 1970s. While there were several years with recessionary conditions, there was more of a demand for gold than dollars, at least when taken in the context of their supplies.

If Turkey is any indicator, then recessions in other countries will likely lead to a downturn in gold. But we have to remember that things can change quickly.

In the U.S. for example, if there is another recession, you can probably safely bet that Janet Yellen and company at the Fed are going to intervene once again and create more money out of thin air. This will ultimately be bullish for gold.

So even if we see a downturn in the economy – whether in the U.S. or globally – we can’t be sure that this is going to be bad for gold. Initially it may be, as people seek to liquidate assets and run to cash. But it may also spark a new run in gold.

The price inflation rate in Turkey right now is approximately 8%. If this goes higher and people start to worry about the future purchasing power of their money, then the demand for gold could pick back up again quickly.

Perhaps this could be an interesting experiment to see how people will act in this situation. It may tell us what is to come on a global scale.