(Bloomberg) -- Turkey is facing a surge in gold smuggling as people seek to profit from the country’s growing premium to international markets due to a cap on imports.

Security forces have seized about 350 kilograms of smuggled gold at border crossings so far this year, already more than 60% of what they found in the whole of 2023, according to an official with knowledge of the matter, who spoke on condition of anonymity as they weren’t authorized to brief the media.

In a single operation in the eastern province of Van near the Iranian border, 88 kilograms of gold bars worth more than $6 million were found hidden under the seats of a car, Interior Minister Ali Yerlikaya wrote on X last week.

Organized criminals – or even just opportunistic holidaymakers – who make it to Turkey can sell their gold at a premium of around 7% above international markets, or $5,000 per kilogram, according to Bloomberg calculations based on prices at Istanbul’s 15th-century Grand Bazaar.

Travelers are legally allowed to bring gold or jewelery worth up to $15,000 each into the country for “non-commercial” use without declaring it, according to the Trade Ministry’s website.

Supply Squeeze

International gold prices are already at a record, but what’s driving the extra premium in Turkey is a surge in retail demand that’s dovetailed with a state cap on supply.

Turks have long used gold as a gift and to protect their savings, particularly during times of instability, like the weakening currency and spiraling inflation that marked President Recep Tayyip Erdogan’s recent experiment in unorthodox monetary policy.

Demand grew so much that last August the government announced a quota system for bullion imports, in a bid to narrow the current account deficit.

That curbed gold supply and the local premium began climbing. Demand continued unabated, driven by negative real interest rates, higher-than-forecast inflation and political uncertainty around elections at the end of this month.

Turkey’s Gold Imports Slump as Government Quota Defies Demand

The Turkish State Mint that has a monopoly on the production of standardized “Republic Gold” coins is working double shifts through to 1 a.m. seven days a week to meet citizens’ demand, Deputy General Director Mehmet Hekim told Bloomberg by phone.

It’s almost doubled its daily output in recent weeks to 700-800 kilograms as of Wednesday, he added. 

Hekim expects demand to ease as people spend more time at home during the Muslim holy month of Ramadan, but for Istanbul Jewelers, Goldsmiths and Moneychangers Association Vice-President Mehmet Ali Yildirimturk, the outlook is still bullish.

“These days there are almost no sellers,” he said. “When there’s lots of these small-scale buyers it creates demand and the price explodes.”

--With assistance from Ugur Yilmaz.

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