After repatriating 104 tonnes from the Bank of England (BOE) in 2018, the Central Bank of Turkey (CBRT) sent gold back to London in 2020 and 2021. Amid economic turmoil weakening the Turkish lira, CBRT is likely Using his gold at BOE as collateral for foreign exchange (FX) loans. The situation in Turkey is reminiscent of Venezuela a few years ago.
Calculating Turkey’s net gold reserves is complicated as the CBRT and the Turkish Ministry of Finance have launched multiple gold lending programs since 2011, all of which appear on the central bank’s balance sheet. Put simply, I took the tonnage “owned by the central bank” in the CBRT annual report – this excludes gold submitted by banks for reserve requirements and Treasury gold – and subtracted the outstanding Turkish lira for gold swaps*.
The World Gold Council (WGC) calculates Turkey’s net gold reserves differently. My estimate for Turkey’s net gold reserves as of December 31, 2021 is 354 tons, about 300 tons less than the IMF reported, while the WGC reports 394 tons. A detailed discussion on this topic can be found in the appendix.
*A swap in this article refers to a spot sale (e.g. selling gold for dollars) settled by a forward contract (buying gold with dollars) at a slightly higher price reflecting an interest rate. A swap can also be viewed as a secured loan (borrowing dollars with gold as collateral).
Return of repatriated gold
In 2017 and 2018, according to its annual reports, CBRT repatriated all of its gold from the Federal Reserve Bank of New York (FRBNY) and the Bank for International Settlements (BIS) and all but 6 tons from BOE. All the repatriated gold was placed in Borsa Istanbul’s vaults. CBRT is heavily influenced by Turkey’s President Erdogan, who has strained relations with the West. The central bank prefers to store gold on its own soil to prevent competitors from influencing disputes.
But in 2020, CBRT began shipping gold back from Turkey to London, one of the most liquid gold markets in the world. At the end of 2021, CBRT held 78 tons on the BOE. She may want to hold gold for an emergency sale in London. It is more likely that the gold will be exchanged for foreign currency to defend the lira or to make international payments.
Turkey’s economy is in dire straits. Consumer price inflation is at 80% and the Turkish lira has lost 90% of its value against the US dollar in less than 14 years. The currency crisis is eating away at Turkey’s foreign exchange reserves.
Parallels to Venezuela
The similarities between Turkey and Venezuela are striking, mainly because the economic policies of both countries are irrational. In 2011, in an act of economic nationalism, socialist Hugo Chávez, then-President of Venezuela, ordered 85% of the central bank’s gold reserves to be returned. Two years later, due to the ruinous monetary policy, inflation reached 40% and the Venezuelan bolivar began its steep descent. Needing foreign exchange, the Central Bank of Venezuela (BCV) signed a swap deal with Citibank in 2015 with its gold still in London (Spanish language source). “The value of gold will continue to appear on the central bank’s balance sheet,” it said at the time.
In 2016 I reported that BCV was shipping their gold to Switzerland to need more foreign exchange. Financial conditions did not improve in Venezuela under Socialist leadership, and in 2017 BCV let a swap expire. The gold security was lost. By this time, Venezuela had already reached hyperinflation.
In the years that followed, Venezuela continued to sell currency gold abroad to pay for the importation of basic goods. In addition, current President Maduro is said to be making money smuggling conflict gold (Dutch language source). How much monetary gold BCV has left is unclear.
President Erdogan, on the other hand, does not believe in raising interest rates to stop the lira from falling in value. He believes higher interest rates will fuel inflation, not the other way around. On January 1st this year, it cost 13 Turkish lira to buy 1 US dollar; At the time of writing it takes 18 lire. This will not end well if Erdogan continues to control and take over CBRT Inflation will magically go away on its own.
There is severe pressure on CBRT’s international reserves – gold, FX and SDRs. My estimate for CBRT’s net gold holdings is at most 354 tonnes (end 2021) but could be significantly lower if some of this was swapped for foreign exchange in London. If all gold is exchanged from CBRT to BOE, then 78 tons must be subtracted from the total (354 – 78 = 276). If Turkey cannot unwind the swap by buying back its gold, the security will be lost.
I haven’t been able to find any off-balance sheet data showing how much gold CRBT has swapped out. I found a quote in an LBMA special on the Turkish gold market published in August 2021. From the LBMA:
After Turkey’s foreign exchange reserves fell to a decade-low over the summer, some gold holdings are said to have been mobilized to prop up the lira and/or repay international debt.
It may be that this quote refers to gold for CBRT FX swaps in London.
According to this website by two Turkish economists, CBRT’s international net reserves in 2021 were negative when considering all foreign currency liabilities (on and off balance sheet). Recently, Reuters reported that Turkey’s net international reserves are negative. If this is correct – I was not able to calculate CBRT’s net foreign exchange reserves myself – it means that Turkey will not be able to pay its international debt obligations even if it sells all its gold and SDRs . Only an emergency loan from the IMF or a miracle can save them.
The following explains how I calculated Turkey’s Net Gold Reserves.
Beginning in 2011, CBRT allowed commercial banks to partially meet their lira reserve requirements in gold. The aim was to lure physical gold into the financial system “under the mattress” that banks would use for reserve requirements (RR), thereby freeing up lira liquidity. Gold QE if you will. The scheme was modestly successful as most of the gold submitted by banks for RR was borrowed in London. This facility is called a Reserve Option Mechanism (ROM).
In 2018, the Turkish Ministry of Finance started issuing gold bonds. The borrowed gold will be transferred to CBRT’s balance sheet, thereby increasing CBRT’s gross gold reserves and gold liabilities to the Treasury. Gold bond issuance has intensified, as measured by the CBRT’s gold debt to the Treasury. See the diagram below.
In 2019, CBRT established a lira-for-gold swap market. Turkish commercial banks can exchange gold for lira at their central bank, giving banks an incentive to attract physical gold from investors. CBRT simply prints lira to pay for the swaps. Off-balance sheet swap data from CBRT allowed me to calculate the total amount of gold swaps outstanding (buy side, listing and auction method).
As mentioned, my starting point in calculating CBRT’s net gold reserves was the tonnage “owned by the central bank” in the annual reports. Cross checks confirm that this amount excludes gold in the ROM facility and Treasury gold in the CBRT balance sheet. I then subtracted the total amount of outstanding gold swaps from the total. The result is my estimate for Turkey’s net gold reserves.
For those interested, here is a paper (PDF download link) from the World Gold Council on how they measure Turkey’s net gold reserves.
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.