Q: What links Turkey, India and Vietnam?
A: Weak currencies, trade deficits — and a suspicion that gold is to blame.
Here’s the scenario: a falling currency, a widening trade deficit, and a population buying more and more gold. What’s the result? Well, it tends to be an unhappy government, followed by a policy response.
We’ve seen it Vietnam, where central bankers continue to make noises about “mobilizing” the country’s privately held gold, having last year handed an effective monopoly to a single refiner (later “administratively acquired” by the central bank).
We’re seeing it in India, where the government has quadrupled import duties since the start of the year.
And we may be about to see it in Turkey, where, the Wall Street Journal reports, the government is set to publish plans designed to encourage people to deposit their gold bullion with the country’s banking sector. One proposal reportedly being considered would involve interest-paying gold deposit accounts, with depositors being offered the ability to withdraw gold bars from ATM machines.
It remains to be seen whether this will get off the ground and whether it will be successful.
“The tradition of holding gold outside the system could be hard to shift,” reckons Murat Ucer, an economist at Istanbul-based research firm Global Source Partners.
If the scheme does go ahead, it will be the latest move by Turkey’s authorities to inject a bit of gold into the nation’s banking system. Last November, the country’s central bank announced that banks could hold up to 10% of their reserves in gold.
The backdrop to all this is a falling currency, allied to a balance-of-payments problem. The Turkish lira fell 23% against the dollar in 2011. Turkish gold demand in the fourth quarter of last year was up 128% year-on-year, according to the latest World Gold Council data.
Over the year as a whole, gold-jewelry demand fell slightly, but demand for gold bars and coins, which people tend to buy primarily for investment purposes, rose 99%, to 80.4 tonnes. (Turkey was the world’s largest producer of gold coins last year.)
Almost all of that demand was matched by imports, with Turkey importing 79.7 tonnes of gold in 2011, according to data from the Istanbul Gold Exchange. This is not great news in a country whose current account deficit is around 10% of GDP.
Here we have a clear case of cumulative causation: The Turkish Lira depreciates, people hedge by buying gold, the gold has to be imported, thus putting further pressure on exchange rate and widening the trade deficit.