* Central bank allows use of gold in reserves
* Commercial banks develop deposits to obtain gold
* Such deposits rocket fourfold in past year
* Jewellers' traditional business model pressured
* Helps authorities to mobilise domestic savings
By Seda Sezer and Behiye Taner
ISTANBUL, July 4 (Reuters) - For centuries, Turks have flocked to the jewellery shops of Istanbul's labyrinthine Grand Bazaar to trade their gold - ornaments handed down through their families over generations, or bars stashed under mattresses as savings. But in recent months the shops have a new and unexpected competitor: banks.
The country's commercial banks are pouring their technical expertise and marketing resources into offering their customers gold deposit accounts. Customers hand their gold to a bank and can make withdrawals from their accounts in gold bars or the lira currency; the accounts offer interest rates that are substantially lower than those on normal time deposits.
Gold deposit accounts have been growing around the world, but Turkey's boom has made it a leader in the trend. This appears to have cut the amount of gold flowing to jewellers in the Grand Bazaar and elsewhere in the country, a trend which dismays the shop owners. In the long run, it could threaten their business model, which relies partly on turning scrap gold they buy into jewellery and selling it back to retail customers.
"Where is the emotion when you go to the bank?...This trade should not be seen only as gold or money, it is an emotion, a life," said 60-year old jeweller Turgay Ayardem, who has been working at the bazaar for 45 years.
The head of the Istanbul Chamber of Jewellery, Alaattin Kameroglu, said: "People will make losses because of the banks. They will become less interested in jewellery, and the sector will be hit.
"We as the jewellery sector are also banks' customers, we use their point-of-sale machines, credit cards and loans. We plan to take action against banks which have forgotten about doing banking and started collecting gold," he added without elaborating.
Gold is big business in Turkey, for cultural reasons and also because of the country's experience with bouts of high inflation over the past century. The metal is traditionally given as a gift at weddings and circumcision ceremonies, and demand for imports tends to surge during the summer months.
Turks are believed to have accumulated about 5,000 tonnes of gold in their homes, worth around $250 billion at current international prices, according to the World Gold Council, an industry lobby. It ranks Turkey's gold demand as fifth in the world for jewellery and eighth for retail investment, mostly behind countries with much bigger populations such as India, China and the United States.
Turkey's economic boom has kept imports high despite the weakness of the lira over the past 18 months. Gold imports in the first five months of 2012 totalled 35.18 tonnes, compared with 79.70 in all of 2011 and 42.49 in 2010. Meanwhile, Turkey produced 25 tonnes of gold last year, up from 16.4 in 2010.
With so much money at stake, it was perhaps inevitable that other institutions would muscle into Turkish jewellers' business. The catalyst was Turkey's central bank, which has been trying to cool breakneck growth in commercial bank lending without interest rate hikes that could hurt exports by appreciating the currency. It has pursued this goal by adjusting reserve requirements, the proportion of deposits that commercial banks must hold at the central bank instead of lending out.
In September 2011 the central bank increased the ratio of lira reserves that could be held in the form of gold from zero to 10 percent, raising it further to 20 percent in March 2012 and 25 percent last month. This had the effect of drastically increasing banks' appetite for gold.
They responded by promoting gold deposit accounts. Early entrants into the business included Denizbank and Islamic lenders Kuveyt Turk and Bank Asya ; others are preparing to step in.
"We collected 650 kilograms of gold in the last month and attracted 3,200 new customers with "DenizGold Days"," said Cem Turgut Gelgor, Denizbank's executive responsible for gold banking.
One of Turkey's largest banks, Isbank, plans to collect $1 billion of gold or around 18-20 tonnes in its deposit accounts by the end of this year, deputy chief executive officer Erdal Aral told Reuters.
Bensu Ozgan, a 43-year-old retired textile sector worker who was visiting a Denizbank branch, said she previously stored her gold holdings in a safe at a bank, but would now keep them in a Denizbank gold account.
"After watching a Denizbank advertisement on television and my friends' recommendation, I came here to open an account. Now I will save 150-200 lira every month and buy gold in grams and add it to this account," Ozgan said.
There are no reliable statistics for how much the flow of gold to jewellers has declined because of the banks' marketing push. But an indication can be seen in data from the banking watchdog which shows total gold deposits at Turkish banks soared to 15.6 billion lira ($8.6 billion) in April from 3.73 billion lira a year earlier.
The central bank predicted its latest 5 percentage point hike in the portion of lira reserves that can be held in the form of gold would be worth about $2.2 billion.
Some jewellers insist the boom in gold deposit accounts will prove transitory. They argue many Turks will stay loyal to their traditional links with jewellery shops; any future reduction in reserve requirements, when economic conditions change, could reduce banks' appetite for gold.
"It's impossible to break a habit of centuries with advertising. Gold keeps Turks warm," said Mehmet Ali Yildirimturk, a 63-year-old trader at the Grand Bazaar, as he displayed old gold coins from the reigns of Ottoman Sultans.
But the rise of gold deposit accounts in some ways suits the purposes of Turkey's monetary authorities; by prompting people to take gold holdings out from under their mattresses and put them back in circulation, it may help to reduce the growth of the country's gold imports, cutting its current account deficit. It also ties in with the government's desire to mobilise idle savings.
After insisting that he was confident of keeping his customers' loyalty, Yildirimturk then conceded that his business might face major change.
"You cannot stand against this wind. The jewellery sector will be transformed, and one day in the future only jewels will be bought from jewellery shops, not gold coins for investment," he said.