Turkish Central Bank Sends Gold To London. In Need for FX?
Turkish Central Bank Sends Gold To London. In Need for FX?
Analyzing Turkey's reversal of gold repatriation and the striking parallels with Venezuela's economic crisis
Introduction
After having repatriated 104 tonnes from the Bank of England (BOE) in 2018, the Central Bank of Turkey (CBRT) has been sending gold back to London in 2020 and 2021. Amid economic turmoil that's weakening the Turkish lira, CBRT is likely using its gold at BOE as collateral for foreign exchange (FX) loans.
Turkey's situation is reminiscent of Venezuela several years ago—a concerning parallel that highlights the risks of using monetary gold as economic policy tools.
Complex Reserve Calculations
Computing Turkey's net gold reserves is complicated, because since 2011 CBRT and the Turkish Treasury have launched several schemes to borrow gold, which all show up on the central bank's balance sheet. This complexity makes it difficult to determine actual available reserves. For investors seeking transparency and security, physical gold ownership provides clear, unencumbered precious metals exposure.
Table of Contents
Sending Back Repatriated Gold
In 2017 and 2018, CBRT repatriated all its gold from the Federal Reserve Bank of New York (FRBNY) and the Bank for International Settlements (BIS), and all but 6 tonnes from BOE, according to its annual reports. All the repatriated gold was moved into the vaults of Borsa Istanbul.
Complete Gold Repatriation
CBRT repatriated gold from FRBNY, BIS, and BOE (except 6 tonnes), moving all gold to Borsa Istanbul vaults under President Erdogan's economic nationalism policy.
Reversal Begins
CBRT began shipping gold back from Turkey to London, with 78 tonnes held at BOE by end of 2021, likely as collateral for FX swaps.
Economic Pressure
With 80% inflation and currency crisis, Turkey faces intense pressure on international reserves requiring emergency FX access.
Political Motivations
- CBRT highly influenced by President Erdogan
- Strained ties with Western nations
- Preference for domestic gold storage
- Prevention of foreign leverage in disputes
Economic Realities
- London is most liquid gold market globally
- Emergency sale capabilities required
- FX swap arrangements for lira defense
- International payment obligations
The Liquidity Factor
Yet in 2020 CBRT began shipping gold back from Turkey to London, which is one of the most liquid gold markets globally. At the end of 2021 CBRT was holding 78 tonnes at the BOE. Possibly, it wants to hold gold in London for an emergency sale. More likely the gold is being swapped for FX to defend the lira or make international payments.
Parallels With Venezuela
The similarities between Turkey and Venezuela are striking, first and foremost because both countries' economic policy is irrational. The historical parallels offer important lessons about the risks of using gold reserves as policy tools.
Hugo Chavez Era (2011)
Socialist Hugo Chavez ordered 85% of Venezuela's central bank gold reserves to be repatriated in an act of economic nationalism, setting the stage for future crisis.
Crisis Escalation (2013-2015)
Due to ruinous monetary policy, inflation reached 40% and the Venezuelan bolivar began its steep descent. BCV signed swap agreements using gold still in London as collateral.
Gold Losses (2016-2017)
BCV shipped gold to Switzerland for more FX, then allowed a swap to lapse in 2017. The gold collateral was lost, and Venezuela reached hyperinflation.
Venezuela's Fate
In the following years Venezuela continued to sell monetary gold abroad to pay for the imports of basic goods. In addition, current President Maduro makes money off smuggling conflict gold. How much monetary gold BCV has left is anyone's guess. This represents a cautionary tale about the risks of treating gold reserves as a short-term policy tool.
Turkey's Economic Crisis
Turkey's economy is in dire straits. Consumer price inflation is at 80% and the Turkish lira has lost 90% of its value versus the U.S. dollar in less than 14 years. The currency crisis is eating into Turkey's FX reserves.
Current Economic Indicators
- Consumer price inflation: 80%
- Lira decline: 90% vs USD (14 years)
- Exchange rate deterioration: 13 to 18 liras per USD (2022)
- FX reserves under severe pressure
Policy Problems
- Erdogan opposes raising interest rates
- Believes higher rates fuel inflation
- Unorthodox economic theories applied
- Central bank independence compromised
Policy Disconnect
President Erdogan doesn't believe in raising interest rates to stop the lira from plummeting in value. He thinks higher interest rates will fuel inflation, instead of the other way around. On the first of January of this year, it took 13 Turkish liras to buy 1 U.S. dollar; at the time of writing, it takes 18 liras.
The Gold Reserve Dilemma
This will not end well if Erdogan continues to control CBRT and assumes inflation will magically disappear by itself. The pressure to monetize gold reserves grows as traditional monetary policy tools are rejected, creating a dangerous precedent for other central banks. For investors, this highlights why gold prices can be affected by central bank policy decisions and why personal gold ownership provides independence from such political risks.
Understanding Turkey's Gold Reserve Calculations
The World Gold Council (WGC) computes Turkish net gold reserves differently than independent analysts. My estimate for Turkey's net gold reserves on December 31, 2021, is 354 tonnes, roughly 300 tonnes less than what the IMF reports, while the WGC discloses 394 tonnes.
Reserve Option Mechanism (ROM)
Since 2011, CBRT allowed commercial banks to fulfill lira reserve requirements partly in gold. Most gold submitted for RR was borrowed in London, creating complex accounting.
Treasury Gold Bonds
Starting in 2018, the Turkish Treasury began issuing gold bonds. Borrowed gold transfers to CBRT's balance sheet, increasing gross reserves and gold liabilities.
Lira-Gold Swap Market
In 2019, CBRT set up a lira for gold swap market. Commercial banks can swap gold for liras, with CBRT simply printing liras to pay for the swaps.
Net Reserve Reality
There is intense 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 can be significantly lower if some of it has been swapped for FX in London. In case all CBRT's gold at BOE is on swap, 78 tonnes must be deducted from the total (354 – 78 = 276).
Investment Implications for Gold Investors
Turkey's situation demonstrates several important principles for gold investors and provides insights into how central bank gold policies can affect global markets.
Central Bank Risk Factors
- Political interference in monetary policy
- Gold used as policy tool rather than reserve
- Complex accounting obscures true reserves
- Collateral arrangements reduce available gold
Market Implications
- Central bank gold flows affect global supply
- Economic crises force gold sales/swaps
- Political risk premiums in gold markets
- London market liquidity advantages
Lessons for Individual Investors
Turkey's experience highlights why individual investors might prefer direct gold ownership rather than relying on government gold reserves. Physical gold provides protection that can't be compromised by political decisions or economic policy mistakes. The transparency and security of personal gold holdings contrast sharply with the complex and risky arrangements central banks sometimes employ.
Investment Strategy Considerations
According to this website by two Turkish economists, CBRT's net international reserves were negative in 2021, when taking into account all (on and off balance sheet) FX liabilities. This extreme situation reinforces the value of gold as a hedge against currency and policy risks, but also shows why personal ownership may be preferable to exposure through government reserves.
Conclusion and Outlook
There is intense pressure on CBRT's international reserves—gold, FX, and SDRs. The complexity of Turkey's gold accounting makes it difficult to determine exact available reserves, but the trend is clearly negative.
Critical Uncertainties
- Actual net gold reserves unclear
- Off-balance sheet swap arrangements
- Potential for forced gold sales
- Risk of collateral loss
Systemic Risks
- Net international reserves possibly negative
- Inability to service international debt
- Need for IMF emergency assistance
- Economic policy credibility crisis
LBMA Assessment
The London Bullion Market Association noted in August 2021: "After Turkish foreign exchange reserves dropped to a multi-decade low over the summer, some gold holdings are believed to have been mobilized to support the lira and/or repay international debt." This quote likely refers to gold for FX swaps by CBRT in London.
If true—and some economists suggest Turkey's net international reserves are negative—this means that Turkey won't be able to pay its international debt obligations, even if it sells all its gold and SDRs. Only an emergency loan by the IMF or a miracle can save it.
Broader Implications
Turkey's situation serves as a cautionary tale about the risks of treating gold reserves as short-term policy tools rather than long-term wealth preservation. For investors, this reinforces the importance of physical gold ownership and silver holdings that remain independent of political and policy risks that can compromise government-held reserves.
When Turkey can't unwind swaps by buying back their gold, the collateral is lost—a scenario that Venezuela experienced and one that should concern anyone relying on government gold reserves for wealth protection.