Turkey - another country significantly raising its gold reserves

(June 29, 2018 - by Lawrie Williams)

For the past few years we have been seeing an overall rise in national reserves of gold – at least from countries which are believed to be providing accurate figures to the IMF.  But if we look at the IMF gold reserve data, the reserve increases have been confined to relatively few nations – notably China (when it deigns to report its increases), Russia, Kazakhstan and, recently, Turkey.  In part these reserve increases represent a means of maintaining the size of their forex holdings, yet while reducing their dependence on U.S. Treasuries as an integral part of these holdings.

As Dr Martin Murenbeeld noted recently he anticipates this trend for central banks to add to their gold holdings to increase, particularly if the U.S. becomes deeply embroiled in a global trade war.

Dr Murenbeeld thus anticipates an increasing trend for countries to move away from U.S. dollars and dollar-based securities as a reserve currency in part due to the nation’s enormous debt position, but also due to what has to be considered the U.S. utilising its dominant trading and forex positions to its own advantage.  There are the beginnings of a logical fear that the U.S. may freeze assets held in order to gain other advantages and concessions from countries it may view as hostile – indeed it has already done so.  So there is a tendency towards reducing dollar dependence which could well grow.  Holding gold instead of U.S. dollars is one way of achieving this aim and reducing what may be seen as counter party risk.

Thus countries which follow policies which might be seen as counter to those of the U.S. are beginning to feel particularly at risk.  Among these will be Russia and its erstwhile allies from the Commonwealth of Independent States and it is notable that Russia itself and Kazakhstan are at the forefront of such a central bank gold-purchasing policy.  Both are themselves important gold producers and most of their gold reserve increases are from buying up local production.  Other CIS nations – notably Kyrgyzstan, Tajikistan and Belarus have also been buying gold, but because their economies, and overall forex reserves are small by comparison, the amounts being purchased are pretty much under the radar

But one country which has added a significant amount to its reserves over the past couple of years is Turkey, which is becoming increasingly aligned politically with Russia.  In 2017 Turkey added 85.9 tonnes of gold to its reported central bank reserves – the second highest of any country, and in the first four months of the current year another 33.9 tonnes.  Metals Focus, in its most recent weekly newsletter comments: “It has been increasingly apparent that President Erdogan, and hence the current Turkish government, are pro-gold, with both promoting its role in the financial system, while at the same time also trying to lessen the country’s dependence on the dollar.”

The consultancy goes on to note that “Until 5th May 2017, the Turkish central bank’s gold reserves had remained stable at 116.1 tonnes. However, since then these reserves have more than doubled, reaching 239 tonnes (as of 14th June). The increase is the result of the latest strategy of the central bank to buy locally mined and refined gold in Turkey through the Borsa Istanbul (BIST), which they started to do this January.

Metals Focus goes on to explain also the additional reserve reporting mechanism involving Turkey’s commercial banks who can benefit from the Reserve Option Mechanism (ROM) offered by the central bank. Simply put, as part of the ROM banks are allowed to hold a certain ratio of Turkish lira reserve requirements as foreign exchange and/or gold in increasing tranches. This allows them an opportunity to use gold as a tool to create more room for lira credit lines. A review of the commercial bank gold holdings over the past 12 months shows that these have risen from 321.7 tonnes on 5th May last year to 348.9 tonnes as at 14th June 2018. As a result, Turkey’s total holdings, including those of commercial banks, peaked at 595.5t on 30th March 2018, before slipping to 587.9t on 14th June, but the consultancy goes on to note that the recent decline was due to a dip in commercial bank holdings as their customers liquidated some of the gold held in their accounts, rather than a change in the central bank’s own gold reserves.

Turkey also reports the sum of the central bank holdings and those of the commercial banks as its total reserve figure so these can be rather more volatile than those of the other countries which just report central bank holdings.

China, of course, is a different matter altogether and has reported zero increases in its official gold reserve figure for the past nineteen months.  We have expressed scepticism about the true level of Chinese gold reserves as the country has a track record of reporting zero increases for a considerable period of time – five to six years recently – and then coming up with a substantial reserve acquisition which it says has been held in non reportable accounts, but is actually there the whole time.  We have speculated that substantial amounts of Chinese gold may  be being held, like Turkey, by the nation’s commercial banks (all state-owned), but unlike Turkey this is not reported unless and until it is eventually moved into the official central bank vaults.  This could at least in part account for the large discrepancy between Chinese gold demand figures as estimated by the major consultancies and known gold flows into China plus the country’s own substantial gold production as comfortably the world’s No.1 gold producer.