When I talk about the Love Trade, India and China are frequently discussed since the two countries have been dominating world jewelry demand. Turkey’s love for gold, though, cannot be overlooked, as an estimated 5,000 tons have been accumulating in people’s homes for years.

Turkey is now offering incentives for people to store their gold in the bank instead. By acknowledging the hidden wealth of the Eastern European nation, this move will allow banks to lend more money and ultimately improve the country’s current account balance.

Turks’ Love Trade dates back more than 5,000 years ago, when gold jewelry was produced in Anatolia. That city still holds the world’s oldest jewelry art. Istanbul is the center for the production of gold jewelry and is also home to the Grand Bazaar which was constructed in 1461 and remains “the heart of the Turkish gold jewelry sector,” says the World Gold Council (WGC). Similar to India and China, Turks view the precious metal as both an adornment and a traditional form of saving. From a very young age, girls learn that gold is a wealth preservation asset, which helps explain why almost a quarter of those surveyed in Turkey today chose gold as their top investment choice, says the WGC.

You can see on the chart below how jewelry has historically been a majority of gold demand until just last year when half of gold demand came from investment, as gold coins and bars reached record levels, says the WGC.

In November 2011, ahead of the changes considered under Basel III, Turkey’s central bank said it would allow lenders to hold up to 10 percent of local-currency reserves in gold, according to the Wall Street Journal. As of March 2012, the central bank increased the percentage to 20 percent.

Now, retail investors can not only hold their gold jewelry, bars and coins in an account at a bank, but can also accumulate gold in accounts, with tax-free 24-carat gold transactions. The WGC says people can choose among gold deposit accounts, gold checks, gold credits, gold transfers, gold gram accounts and protected capital gold backed gold funds. Now, total gold deposits in the banking sector have reached an estimated $7.69 billion, according to the WGC.

I discussed last June how gold was being considered as a Tier 1 asset by the Basel Committee on Banking Supervision. The international banking supervisory committee helps ensure global banks have adequate capital, and the yellow metal was historically considered a Tier 3 asset with a net stable funding ratio of 50 percent. This means that banks’ gold holdings have historically been discounted by 50 percent of their current market value. I said at the time that upgrading gold to Tier 1 encourages banks to increase gold’s share of their reserves.

By making this change last year, Turkey is light-years ahead of other central banks around the world since the changes do not go into effect until January 2013.

Related Posts:

Pocket of Strength: Turkey Retail Stocks Rally
Is Gold About to Have Its Status Upgraded?

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Facebook’s highly anticipated initial public offering last week helped the company raise $16 billion, a record for tech IPOs. It’s refreshing to see investor excitement rally around the stock, as the U.S. needs innovative businesses to thrive and attract capital. However, as behavioral finance warns, be cautious of a herd mentality.

Last November, the IPO deal of the day was Groupon. On the first day of trading, shares rose to a high of $31 from an initial offering price of $20.

By Thanksgiving, the stock had fallen below the IPO price, and only a few months later, uncertainty popped up around the company’s accounting methods and financial controls. The stock fell further, with the market devaluing Groupon by about 50 percent in only six months. How’s that for a group buy?

It’s interesting to note that the value of Groupon’s stock has lost more than $13 billion since the peak on the first trading day through April 30. For comparison, if you look at the total net assets in Lipper’s precious metals mutual fund peer category, assets fell $8.3 billion over the same timeframe. Investors lost more than $5 billion more in one tech stock alone than in all of the precious metals funds combined.

Gold—A Reality Check
Investors have “defriended” gold recently in favor of the dollar, as Greek and French voters rejected austerity measures. Greeks have been responding to their escalating debt issues for a while by steadily pulling money from overnight deposits. I often say, money goes where it is best treated, and these deposits will need to find a safe haven.

It’s not only Greece the market is worried about, says BCA Research. In a special report aptly named, “In Case of Emergency Grexit,” the firm says there’s extra pressure on Spain and Italy, “which imminently needs a large bailout of its banking system.” The 10-year yields for each country have reached 6 percent today, and while there are funds to sufficiently cover Spain, there aren’t enough funds for Italy, too, says BCA.

So if the European Union (EU) stops the flow of bailout funds, Greece, unable to pay wages, would invoke social unrest, according to BCA.

More importantly, without funds from the EU, Greece would default on its bonds. Looking at what the country owes this year alone, $1 to $7.6 billion is due each month, says BCA. The European Central Bank would then most likely stop providing funds to Greek banks, causing more individuals to pull money. “With deposit flight, and no injections from the ECB, the banks would be bust and Greece would be hemorrhaging money,” says BCA.

It’s also important to look at the investors of Greek debt. According to the London Evening Standard earlier this year, French banks are the largest holders of Greek government bonds and private-sector debt in the eurozone, with $47.9 billion exposure to Greece.

In the end, I believe governments in Europe lack the courage to be fiscally disciplined. Earlier this week, I told Aaron Task and Henry Blodget on The Daily Ticker that when push comes to shove, Europe will likely continue to print money. This should be positive for gold.

At the Hard Assets Conference earlier this week, Greg Weldon compared the money printing situation to a sink. In an interview he gave with The Gold Report, Greg said:

“It’s going to be very difficult to see how economies in Europe, the U.S. and Japan can stand on their own two feet without the assistance of central banks debasing currency through debt monetization. I liken it to filling the sink halfway up with water and pulling the plug out of the drain. Of course, the water level will recede unless you turn the faucet on and start more water pouring into the sink. The level of water represents asset prices, the water flowing out of the faucet represents liquidity provided by global central banks and the drain represents the real macro economy, which has not been fixed.

“At the end of the second round of qualitative easing, when the Fed shut off the faucet, the water level (asset prices) started to go down. But now the water is running again—particularly with some of the measures instituted by the European Central Bank, with its three-year loan program, the federal liquidity swaps and the back-ended way that it's managed to involve the International Monetary Fund.

“The problem with all of this is it does nothing to fix the underlying problem, which is too much debt. This is not sustainable. Central banks turning on the water faucet is good for asset prices. The real solutions of fiscal austerity, which are probably not palatable to most politicians in Europe, are the real struggle as we go forward. This problem is not going to go away.”

So, during times like we’ve had recently, when the dollar is chosen over gold, I apply math. The chart below shows the 60-day percentage change of the gold price and the U.S. dollar. Gold’s recent weakness has triggered a -2.2 sigma event in standard deviation terms. Over the past 10 years, this has happened less than 2 percent of the time. Historically, each time gold has touched the -2 sigma mark, the precious metal has rallied.

This bounce is exactly what we saw on Thursday and Friday this week.

See more slides from my Hard Assets Investment Conference.

While gold may not go up vertically from here—as frequent readers know, the yellow metal historically has fallen in June and July—with the extraordinary events occurring in Europe, I believe investors will soon “friend” gold once more. As we wait for the central banks around the world to act, I encourage investors to consider dollar-cost averaging. It’s a way to stay invested, and more importantly, to avoid making emotional investment decisions.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

No investment plan can guarantee a profit or protect against a loss in a declining market. Evaluate your financial ability to continue in such a program in view of the possibility that you may need to redeem fund shares in periods of declining share prices as well as in periods of rising prices. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Demand for gold was relatively resilient in the first quarter of 2012, with global demand falling 5 percent on a year-over-year basis, says the World Gold Council. Marcus Grubb, managing director of investment, calls this slight quarter decline in demand “noise in the context of 22 percent rise” in the price of gold compared to first quarter of 2011. Also, gold demand was very strong in the first three months of last year.

Gold faced a complex quarter, as you can see by looking at jewelry demand by country. There was a significant rise in demand for jewelry from Russia, Egypt, Indonesia, Taiwan, and China, according to the World Gold Council (WGC) compared to the first quarter of 2011.

Demand from Russia, which increased 28 percent compared to the same time last year, not only reflects stock building, but WGC says consumers had the wind behind their backs, with “historically low inflation, GDP growth, improving consumer confidence and real wage growth.”

The WGC says that Taiwanese jewelry demand was driven by “a strong wedding season, Chinese New Year gifting and gifts for babies born so far during this auspicious Year of the Dragon.” Indonesia’s increase also most likely reflects Chinese New Year, as retailers replenished supply after a strong buying season.

And, for the second quarter in a row, overall Chinese demand was higher than Indian demand, confirming China as the world’s largest gold market, says Mr. Grubb. China’s demand in the first quarter hit a record, bucking “the global trend by surging 10 percent to reach a new quarterly high” equating to 255 tons, according to the WGC.

Strong jewelry demand was offset by several other countries, including India, which was  negatively affected by imposed taxes and jewelers’ strikes. This caused an “unsettling quarter” for the country, says the WGC, which has historically seen strong jewelry demand over past quarters.

The higher price of gold likely caused a temporary setback in demand in countries such as South Korea, Saudi Arabia and Turkey. The WGC says South Korean consumers substituted silver and lower-carat gold as a result of increased prices.

What’s important to note is that during the past few years of the bull market for gold, we’ve seen continued resiliency in jewelry demand, remaining around 50 percent of total demand, says the WGC.

Gold supply remains modest, as mine production and recycled gold supplies increased 5 percent on a year-over-year basis. Mine production alone increased only 2 percent over the previous year, says the WGC, which follows the trend over the past four years. Mr. Grubb says he sees the trend continuing that older mines in South Africa are declining in production, and the higher-than-average production is coming from China, West Africa, Turkey and parts of Asia.

Overall, Mr. Grubb believes a high level of recycling is required as mine production only meets 2,800 tons of demand. Total demand for gold in 2011 reached 4,500 tons! The only way to balance the supply with the demand: keep an elevated gold price.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.