Despite mounting geopolitical risks, gold has done the opposite of what would have been expected and slumped, falling 5% from USD 1,228 to USD 1,162 per ounce during the Turkish currency crisis. Could it have been Turkish President Erdogan’s plea to his own people? “If you still have euros, dollars or gold under your pillow, you should change it to lira. This is a national duty.” Um….no, unlikely. The idiosyncratic nature of modern risk-aversion phases, versus the ‘sell everything with high beta’ mentality of the past, suggest that rabid gold buying is unlikely. Investors waiting out a storm will head to the USD or even Bitcoin or other cryptocurrencies that are viable alternatives during system breakdowns. We remain negative for gold mid- and long-term.
Meanwhile, risk appetite continues to stabilize as USD/TRY grinds lower. The outlook for contagion has been reduced as the size and make-up of Turkish assets has generally been determined. Limited exposure to toxic assets by foreign financial institutions has given traders confidence the ‘event horizon’ will not be breached. America’s additional tariffs on Turkish products will stay, but Turkey has received a USD 15 billion lifeline from Qatar. Crisis avoided for now, but long-term damage to Turkey remains to be determined.
