The gap between physical gold prices in Türkiye and global prices has sharply contracted, according to traders, after a period of volatility caused by last autumn's global price surge, easing pressure on the Turkish lira.

The spread between the lira-denominated price of physical gold in Türkiye and the TL equivalent of global prices peaked at more than 5%. Traders now say it has narrowed back to its historical average of around 1.5%, reversing the trend.

The wide spread had weighed on the lira in the autumn as surging gold demand was met through imports, traders said. In local retail flows, demand for foreign currency and gold has eased, while gold supply has increased.

This shift has helped relieve pressure on Türkiye's external balances and the lira in recent weeks, traders told Reuters on Monday.

Factors driving the reversal include a decline in foreign exchange-protected deposit (KKM) balances, the end of the sharp rally in global gold prices, and fading local demand that had been strong during the summer months.

The value of KKM deposits has shrunk to $600 million from a peak of $140 billion in August 2023.

Foreign exchange and gold supply in client-based transactions, particularly in Istanbul's Grand Bazaar, has also risen markedly over the past week, traders said. During this period, the dollar/lira exchange rate held steady around 42.5.

"Local sharp demand for gold has ended," one FX trader said, adding that gold supply has risen since late November.

The central bank estimates that Türkiye's "under-the-mattress" gold stock – or metal stored at home – is almost $500 billion. Physical gold in particular has long been a preferred investment tool in Türkiye to avoid high inflation.

Globally, spot gold surged from above $3,500 in early September to an all-time high of $4,378 in October – a jump of roughly 25% – before easing to around $4,200 per ounce currently.