In recent weeks, global financial markets have been increasingly spooked by an intensifying crisis in emerging market currencies including those of Turkey and Argentina. Add to this the ongoing currency crisis in Venezuela and the currency problems of Iran. While all of these countries have economy specific reasons that explain at least some of their currency weakness, there are some common themes such as a stronger US dollar, high domestic inflation rates, economic mismanagement, reliance on foreign borrowing, and in some cases economic sanctions imposed by the US.
As one currency plummets, this intensifies emerging market risk across the entire asset class, and it’s not unreasonable at this time to at least speculate whether the contagion could spread. The Brazilian Real and South African Rand have come under pressure and in Asia, the Indonesian Rupiah and Indian Rupee are also now weakening against the US Dollar.
It is against this backdrop that physical gold is being increasingly mentioned within these emerging economies, with gold coming to the fore as it always does in times of crisis. It is for this reason that its interesting to take a look at a number of these currencies and examine how gold is playing the role of safe haven for these countries’ citizens as well as creating a challenge for these nations’ leaders and central banks
Buying up Gold as the Turkish Lira Plunges
With ongoing currency and external debt problems, Turkey, with a population of 90 million, has played a central role in the current currency crisis and remains a catalyst for potential risk contagion across other troubled emerging market currencies.
Turkey’s currency woes come against a backdrop of a stronger US dollar, domestic inflation of 15%, increasing default risk, market skepticism about the independence of Turkey’s monetary policy, and a series of US sanctions against the Turkey economy.
Although the Turkish Lira was already weakening during the early part of the year (falling 6.4% against the US Dollar from January to April), things took a turn for the worse in May with the Lira falling by a further 9% against the dollar during that one month. Another 6% drop in the Lira followed during July. But it was in August that the Turkish currency crisis really accelerated, with the Lira depreciating 28% against the US dollar in an environment of US sanctions and rating agency downgrades of Turkey’s debt.
During the same time frame, the gold price in Turkish Lira rose by approximately 60%, from just under TRY 5000 per troy ounce at the beginning of January, to TRY 7860 per troy ounce at the end of August. This rising local gold price spurred an increase in physical gold demand in the Turkish Gold Market, as reported by Bloomberg at the end of May with “a jump in demand for gold coins” and Turks “buying up gold as the lira plunges in the latest currency crisis”
“Gold priced in lira is more expensive than ever, that’s not deterring buyers, who are looking for a safe haven“
“‘Turkish people have an interesting behavior – they buy gold when the prices are rising, they think it’s gonna rise more,’” said Gokhan Karakan who runs a gold exchange office in the heart of Istanbul’s Grand Bazaar. “People think there is a trend here and choose to buy gold until uncertainty is out of the way.”
Perversely, in August while the Turkey Lira was in free fall, Turkey’s president Erdogan (who is against raising Turkish interest rates) made a nationalistic call for the Turkey public to sell both gold and US dollars and buy Turkish Lira. In a speech to a crowd in the Turkish city of Bayburt on 10 August, Erdogan advised:
