The Turkish appetite for gold: An Islamic explanation

A significant constituent of household wealth in Turkey is gold. Families accumulate gold especially on a variety of cultural occasions such as female-only gold days, circumcision feasts, and engagement and wedding ceremonies. This paper attempts to explain the gold appetite of Turkish households with a rational approach, although still rooted in culture. Many people in Turkey view “earning interest on money” as a transgression of Islamic rules and avoid investing their savings in fixed-income investment instruments. We study the implications of this investor behavior on portfolio gold holdings. Using the Markowitz mean-variance model and monthly return data from 1997 until 2015, we calculate optimal investment portfolios. We find that while the share of portfolio gold holdings is less than a meager 4% if the portfolio includes interest-earning deposits (in addition to the stock index, USD, EURO, and gold), this ratio may go up to more than 50% if interest-earning deposits are not included. Our results show that the role gold plays in an investment portfolio is greatly amplified when interest-earning deposits are not viable. We believe the key factor driving our pronounced findings has been Turkey's historically high rates of inflation. Avoiding fixed-income instruments, many Turkish investors may have turned to gold to shield their savings against inflation and manage portfolio risks caused by its high volatility. Our findings suggest that Turkish policymakers may find it useful to popularize Sukuk (Islam-compliant bonds) if they are to divert household savings away from gold into more productive uses.