Gold: Unimpressed by the Turkish turmoil

Prices hover around $1,210 per ounce, signalling that this is a home-made and country-specific problem

Carsten Menke, OpinionIndustry Expert
Carsten Menke joined Bank Julius Baer in December 2009. In his current position, he is responsible for the analysis of commodity markets, in particular base metals and precious metals. Before moving to Bank Julius Baer, Carsten Menke worked at Sal. Oppenheim Jr. & Cie. in Cologne, where he set up the Commodity Research unit. In 2002, he started working for Deutsche Bank as a Relationship Manager and became investment advisor in 2003. He received his degree in Business Administration at the University of Cologne in 2007 and became a CFA Charterholder in 2011.

August 13, 2018

While emerging markets are under pressure from the Turkish turmoil this morning, the gold market remains unimpressed.

Prices hover around $1,210 per ounce, signalling that this is a home-made and country-specific problem.

The impact on the global gold market should thus be limited, as Turkey is unlikely to trigger a wave of safe-haven demand.

That said, the impact on gold demand in Turkey could even be negative. Jewellery demand, as in many emerging market countries, is highly price-sensitive and with the recent steep increase in domestic gold prices, it is set to face major headwinds.

Investment demand, which is equally large but down around a third thus far this year, should benefit from the turmoil as it provides Turks with a store of value and an inflation hedge.

While local gold prices are up around 65 percent year-to-date, this is entirely due to the depreciation of the Turkish lira versus the US dollar. Hence, it is not gold which hedges against inflation but the exposure it provides to the US dollar.

Other dollar assets, such as US Treasuries and US equities, would have provided about the same inflation hedge as gold. Overall, our view on gold remains unchanged. As long as the dollar remains strong – we believe another couple of months – global gold demand should stay soft and prices should trade rather rangebound.

We still see limited downside against the backdrop of very negative sentiment in the futures market and maintain a neutral short-term view. Yet, a break below USD 1,200 per ounce could trigger more selling and prices could undershoot. Medium to longer term, we remain positive as the dollar should weaken, supporting prices and fostering a recovery in demand.

Any opinions expressed here are the author’s own.

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