Crashing the gold lira is crisis insurance – this is evident in Turkey

Crashing the gold lira is crisis insurance – this is evident in Turkey

Crashing the gold lira is crisis insurance - this is evident in Turkey

“The dollar is actually a shitty currency, but the other currencies are just shitty,” said the famous Swiss investor Marc Faber once. And, as usual, did not mince his words. Without a doubt, his assessment applies to the Turkish lira in any case. Even the euro, which has depreciated sharply against the greenback this year, looks almost like the old D-Mark against the lira – a refuge of stability. Currently there is a good 16 lira for one euro – almost 80 percent more than at the beginning of the year.

This has accelerated at the beginning of the week due to the threat of a downgrading of the credit rating by Standard & Poor’s. The US rating agency lowered the outlook for the to “negative” from previously “stable”. Turkey is currently rated “B +”, ie already in the speculative area.

The Turkish central bank tried to stabilize the lira by selling dollars from its foreign currency reserves. But that was only able to take some of the pressure off the Turkish currency. A strong countermovement would have been expected if the central bank had accompanied the interventions on the foreign exchange market with the prospect of interest rate hikes.

Fight inflation with interest rate cuts

Given an inflation rate of more than 21 percent in the country, one should actually assume that the interest reins will be tightened. Many central banks in other emerging markets are doing the same thing in order to contain inflationary pressures.

But the opposite is happening in Turkey. According to a survey by the Reuters news agency, economists expect the Turkish central bank to lower its one-week repo rate again, from the current 15.0 percent to 14.0 percent. In repo transactions, securities, mostly government bonds, are sold for a certain period of time. However, the seller is already committed to a fixed repurchase. In the meantime, however, he can dispose of the liquidity gained in this way. Since 2016, the average annual inflation in Turkey has been in the double-digit range – well above the official target of five percent.

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But the central bank’s reputation as an independent authority is already ruined. The Turkish President has kicked off three central bank governors since 2019. It is also airy in the Ministry of Finance. After only one year in office, Lütfi Elvan was replaced by his previous deputy, Nureddin Nebati.

The self-proclaimed top economist Erdogan believes that interest rates are an evil that makes the rich richer and the poor poorer.

That may be true under certain conditions, but certainly not with an inflation rate of over 21 percent. The poorer sections of the population, for whom the cost of living eats up most of their income, suffer from this high loss of purchasing power.

Gold preserves purchasing power

It’s a good thing that the Turks are not only a hardworking people, but also have a very strong affinity for gold due to their tradition and long experience with high inflation.
With gold, it has even been possible to increase domestic purchasing power since the beginning of the year and largely offset the currency losses against the euro. The gold price in lira has increased by 80 percent since the beginning of the year, as has the euro in lira.

With Turkish stocks, this was only partially successful despite new record highs on the Istanbul Stock Exchange. Calculated in lira, the Turkish share index ISE National 100 increased by a good 42 percent, but in euros the bottom line was a loss of around 17 percent.

With a little courage, investors who settle in euros will now also have great opportunities in Turkey. How about a house on the Turkish Riviera, for example? The turquoise coast is no less attractive than its French counterpart. It offers fantastic bathing opportunities on cuddly little dream beaches, the hinterland is full of cultural sights and Turkish cuisine has much more to offer than just doner kebab.

The big advantage: the properties there have now become even more affordable compared to the expensive Côte d’Azur due to the crash of the Turkish lira. If you want to get a taste of it first, you should book your summer vacation in Turkey now.

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