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ISTANBUL (MarketWatch) -- In the Merter textile district of this sprawling city that straddles two continents and centuries of history, the Goldas jewelry factory feeds Turkey's ancient passion for gold. Inside, a worker wearing a breathing mask mixes fine gold with alloys into a melting pot heated by a bright flame. He picks up the handle of the pot and pours the golden liquid into a mold where it immediately turns into a solid bar of gold. Eighteen-karat gold.

Most of the work at the Goldas factory is done by machines, but human labor in some aspects of gold and jewelry production is indispensable. On another floor of this brand-new factory, sitting two to a desk and resembling schoolchildren in a science class, workers fit tiny diamonds on ring prototypes using a greenish flame. From time to time they dip the prototype in a jar of chemicals to get rid of the oxidation. It is exacting, skilled work. Cigarettes and ashtrays are present at almost all the tables.

"Historically gold has been the number one currency in the world. That tradition is still lived here," said Cetin Binatli, member of the board of Goldas. "Gold has always been the number one gift item for weddings and for certain other celebrations."

For more than 5,000 years, the people of Anatolia, the part of Turkey that comprises the peninsula of Asia Minor, have been crafting and wearing gold jewelry. Today, Turkey is the world's fourth biggest market for gold jewelry, its third largest manufacturing center and its second biggest exporter, according to the World Gold Council, an industry group.

India is the world's biggest gold jewelry market by volume, followed by the United States, which is the second largest by volume and the largest by retail value.

Turkey is the largest fabricator of gold coins in the world. Its gold coin fabrication totaled 57 tons of fine gold in 2006, while its gold jewelry consumption was 165 tons last year, ranking it fourth in the world, according to GFMS Ltd., a precious metals consultancy.

"It's about culture," said Gokhan Aksu, a dealer at Goldas. "Turkish people like gold."

Goldas is one of Turkey's leading producers of gold, other precious metals and jewelry as well as a major player in precious metals trading. Goldas, through its parent Goldart Holding, is a subsidiary of Yalinkaya Holding, which has business interests in precious metals, energy, construction, information technology and textiles.

"People mainly hold physical gold in Turkey," Binatli said. "They are not interested in gold-backed paper investments. They want to hold it [gold] or keep it in their safes or homes for rainy days, and any time they require funds, they can go and cash it in."

Turks buy gold mainly through retail jewelry stores; they either buy jewelry like bracelets, rings or necklaces, or they buy gold coins. After gold, silver is the second most-popular precious metal in Turkey, while platinum is not very widely used, mostly because of the cost. White gold, an alloy of gold and one other white metal such as silver, is also very popular in Turkey, especially with the young generation.

"We don't compete with the high-end products like Bulgari or Tiffany," Binatli said. "We're more in the middle class to lower class. It's more affordable products. We have diamonds, it's an alternative area, but that's not our competition level."

Goldas GDASY, is listed on the Istanbul Stock Exchange, on the Frankfurt and Berlin-Bremen Stock Exchanges and its ADRs are traded on the U.S. OTC market. Its market capitalization is $170 million. Within the past year, Goldas' shares have outperformed the ISE by 37%.

Goldas has stores in Turkey, Germany, Russia and China and has plans to open stores in central and Eastern Europe. Goldart Holding's consolidated sales were $3.2 billion in 2006.

"The biggest challenge is being a company in an emerging market, because Turkey has not been successful in establishing a country brand," Binatli said. "When you see anything 'Made in Italy, people don't question the quality, they buy it. But when you go with the Turkish-made products, quality is questioned. There's a bad image there."

Goldas is also a member of the Istanbul Gold Exchange (IGE), meaning that the company has a license to import precious metals into Turkey and to trade on the floor of the exchange. The IGE was set up in 1995, so that gold entering Turkey can be registered, thereby reducing smuggling and ensuring the quality of gold imports. Last year, Turkey imported about 190 tons of gold, mainly from refineries in Switzerland, South Africa and Australia. The volume of gold transactions this year has totaled more than 270 tons as of October, according to IGE data.

The exchange is a spot, not a futures, market, so when a member buys a certain amount of gold, that physical gold is delivered to the buyer from the vault of the exchange. Trading at the IGE is done mostly in dollars to avoid local currency risk. The floor of the IGE is a room with three big TV screens and a ticker in the front and rows of computer desks. Most of the trading is done electronically outside of the actual exchange floor.

"Buying and selling on the exchange is very limited," Binatli said. "It's mainly selling. There's one buyer and one seller and once the buyer buys the gold, he withdraws it from the exchange and takes it into the market."

Legally, imported gold has to be traded off the IGE only once. From then on, to avoid paying the commission fee charged by the exchange, most of the trading volume is at the Grand Bazaar, or Kapaliçarsi, one of the biggest covered markets in the world which is always packed with people and goods. There, you can buy anything from gold and jewelry to ceramics, clothes, spices, carpets and Turkish lokum, the confection also known as Turkish Delight. Wandering through the Grand Bazaar is one of the best ways to take in the tastes, smells, noises and spirit of Istanbul.

"When you want to sell gold in this market, you have to be careful about [prices at the] Grand Bazaar," said Aksu, the Goldas gold trader who has an office at the IGE.

Diamond exchange in the works

The IGE plans to open a diamond exchange by the end of next year. In August, Turkey became a member of the Kimberley Process, an international initiative to stop the flow of conflict diamonds.

"Diamonds are very new for this market, but diamond demand is growing," said Yunus Oguzhan Aloglu, vice president of the Istanbul Gold Exchange.

"Three years ago, no one was demanding diamonds. Now, if you don't give a diamond ring to the girl, she will refuse," Aloglu said, half-jokingly.

His spacious office looks out on the Bosphorus and, in the distance, on Topkapi Palace, the official residence of Ottoman sultans located in the old city. A portrait of Kemal Ataturk, revered as the father of the Turkish secular republic, hangs on the wall behind his desk.

Accession negotiations with the European Union and the lack of penetration of the Turkish economy have catalyzed foreign investment, Aloglu said.

"Investors are coming here to make money," he said. "They're very keen on financial companies, jewelry, mortgages, energy. But we have lots more to tell them. It's a very big country."

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Source: https://www.marketwatch.com/story/gold-and-jewelry-market-glitters-in-turkey

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