Turkey’s gold market has been suffering while its economy battles double-digit unemployment, rocketing local gold prices and slowing growth but Sunday’s elections could spark change.
According to the most recent polls, the incumbent 13-year ruling AK Party’s support is ailing – it looks set to win just 40-44 percent of the vote.
All other parties strongly oppose the AK Party’s plans for constitutional reform, paving the way for a rainbow coalition. But local observers are mixed on what this might mean for the economy and the gold market.
At an average of 181 tonnes per year over the past 10 years, Turkey accounts for around six percent of global consumer demand, according to the World Gold Council.
“If a majority is gained by the current party, it would bring some stability to Turkey,” Nazli Mis of Troy Precious Metals told FastMarkets. “That will allow the Turkish lira to regain some ground and bring down the local price and increase demand.”
“If there is a coalition, the Turkish lira will drop, the gold price will rise and reduce gold demand,” she added.
The prospect of higher interest rates in the US and the unpredictable outcome of the election have triggered a 20-percent slump in the lira against the dollar since November.
Domestic gold prices have gained more than 25 percent since then to 3,127.10 lira per ounce, not far from all-time highs – many consumers have therefore liquidated their holdings and refraining from making fresh purchases.
“Mounting political risk, dwindling economic growth, soaring unemployment and concern over the independence of the central bank all fuelled a steep drop in the lira,” the WGC noted in its first-quarter review.
“[But] Turkish consumers’ decision to sell back their holdings in the face of difficult economic circumstances proves that gold continues to perform a key function, acting as a liquid asset that can be easily sold in times of need,” it added, underlining gold’s integral role in the domestic economy.
Turkey had been praised for the cheap credit pouring into the country from major economies and developing markets. But while GDP growth hit 12 percent at one stage, it has come under increased strain recently.
Its economic model, built largely on domestic demand and the construction sector, began to falter when the US Federal Reserve announced the end of its third quantitative easing programme.
Anticipating a stronger dollar, investors pulled money out of the emerging economies. In Turkey, GDP growth slowed to below three percent last year from nine percent in 2010 and 2011, while inflation of around eight percent is far above the government’s five-percent target.
But while a coalition of the current opposition parties may bring instability in the very near term, change is what is needed in Turkey, Çağdaş Devrim Küçükemiroğlu of Metals Focus in Istanbul said.
“[It] would be better for the country in the mid-term, which would be good for gold demand,” he said. “The coalition will make a new constitution and fix the much-criticised justice system, which could eventually bring economic growth through drawing more foreign direct investment into the country and more confidence from the consumers.”
“You have to have a positive outlook for your future – managing expectations is what is most important in an economy,” he added. “At this moment the majority of people are not very hopeful of the future – that needs to change. Another term of the current majority party will not bring that.”
If the AK party claims victory, constitutional changes would bolster President Erdogan’s power and threaten the central bank’s independence.
Erdogan claims that the current parliamentary system is ineffective and wants Turkey to move to a more presidential system of government – similar to Russia.
In contrast, the three main opposition parties – the Nationalist Movement Party (MHP), Republican People’s Party (CHP) and the People’s Democratic Party (HDP) – are more likely to implement populist economic policies and distance the country from a presidential system.
In light of the price increase, local premiums are completely stagnant – as they have been for some time – around parity and into small discounts amid unemployment of more than 11 percent and sky-high local prices.
(Editing by Mark Shaw)
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