Gold News

Money, Politics and Turkey's Gold Repatriation from London

Bullion shipped 'home' for the central bank...
SO WHY did Turkey pull 90% of the gold it was keeping in London back to Ankara and Istanbul? asks Adrian Ash at BullionVault in part 2 of this Turkey-UK-gold shocker.
Latest data in the Central Bank of the Republic of Turkey's 2019 annual report say it kept a little less than 49 tonnes at the Bank of England last December 31st.
That included just 6 tonnes of its own, plus another 43 tonnes held for Turkish commercial banks. They were using that bullion to meet their reserve requirements with the monetary authority back in Ankara under a clever policy launched 7 years earlier.
These New Year 2020 gold holdings in London were down from a peak of 464 tonnes at end-2014 (then some 53 tonnes of CBRT gold plus almost 411 tonnes held for Turkish commercial banks). But Turkey's total gold reserves overall in contrast – including what's held in domestic vaults at the Borsa Istanbul and the Turkish central bank itself – meantime expanded nearly 5% by weight over the same 5-year period to reach 552 tonnes. They grew again to nearly 690 tonnes at September 2020's count.
Smart move? Size-wise, definitely. Especially with abject (and highly politicized) monetary policy from the CBRT itself helping drive gold prices 5-times high against the miserable Lira since 2014.
But why the flight from London storage?
At a guess, money and politics. If you can split the two.
Chart of Turkey's official gold reserves by holder, not location. Source: BullionVault via TCMB
First the money.
The CBRT turbo-charged its gold stockpile in 2011-2012, back when global prices were plateauing around the financial crisis peak, by letting commercial banks hold some of the money they must keep with it in the form of bullion – bullion which it then counts as part of its own reserves.
That policy also allowed commercial banks to do the same with foreign currency accounts too. But for gold, the expectation was that this would perhaps "monetize" some of the huge stockpiles of gold built up by Turkish households. People could take their "pillow gold" out from its hiding place and put it in on deposit at their bank, earning a small rate of interest.
Gold enters the financial system, and household gold helps support the national central bank. Neat!
What actually happened, however, was that Turkish citizens kept their jewelry, coins and small bars hidden at home but also opened gold accounts at their bank using cash. The banks then had to go out and buy gold to back these new accounts from the open market.
Open market of course means London, and so Turkey's reported gold holdings at the Bank of England grew sharply, perhaps because the CBRT helped facilitate the purchases and most certainly because it welcomed them into its custody account at the BoE.
It wasn't until 2017 that the CBRT started buying gold with its own money, rather than letting private savers build its gold stockpile using their cash instead. By then, Turkey's reported holdings had more than tripled from 5 years before. And that extra metal it seems, all held at the UK central bank's custody vaults in London, was stowed away in the CBRT's name.
Yes, the BoE does look after gold bullion for non-central bank accounts. How much and how many, who can guess? But in 2018 – the year of Turkey's big gold exodus from London, pulling out 279 tonnes – Borsa Istanbul reported gold imports into Turkey of just 202 tonnes. That compared with 361 tonnes of gold imports to Turkey in 2017, when the country's gold holdings in London had swollen by more than 94 tonnes.
Why the mis-match? Central-bank gold flows don't show up in anyone's official import and export data, because the world has agreed to keep the movement of such "monetary gold" secret. That's why 2018's big repatriation of Turkish reserves doesn't show in UK trade data either. Public figures from the UK customs authorities in fact say that imports of gold from Turkey in 2018 were 3 times larger than UK exports the other way, a net inflow of privately-traded gold totalling 612 tonnes.
Again, that's not a problem when trying to account for the CBRT's repatriation of 279 tonnes. Except that 175 tonnes of that shipment, according to the CBRT's annual reports, originally sat on the balance-sheets of Turkish commercial banks and financing companies, and was acquired to back their customers' new gold accounts. These firms had registered this gold with the central bank to help meet their reserve requirements. Apparently it sat inside the CBRT's account deep beneath Threadneedle Street in London. Apparently it then retained that status as "monetary gold" when it was shipped home to Turkey, excluded from publicly available data on import and export flows.
Fast forward to October 2020:
"The fate of Turkey's banks is increasingly tied to the fate of Turkey's government – and the stability of the government's finances equally depends on the stability of the banks' foreign currency funding base."
So says money-flow and macro-economics specialist Brad Setser at the Council on Foreign Relations, looking at Turkey's latest currency crisis, now pushing the Lira down to yet more new all-time lows.
"Sum up the banks' exposure to the central bank, the banks' exposure to government’s local dollar debt, and the banks' holdings of Eurobonds, and close to $150 billion (about half) asset side of the banks' foreign currency balance sheet is Turkish sovereign risk. More really, given that some of the foreign currency lending to various projects is implicitly backed by the government."
Put simply, the Erdogan government has borrowed heavily from Turkey's commercial banks, especially foreign currency loans. These will have been charged at a lower interest-rate than raising a loan in Lira, because the Lira is so unstable. But now the Lira has sunk even further, repaying those loans to the commercial banks has become much more expensive to Ankara.
What if it defaults, or threatens to? How about it has the commercial banks' gold close at hand, rather than in a foreign jurisdiction where – who knows? – other lenders might also want repaying?
Guess upon guess upon guess, of course. And note that, post the big repatriation, most of the gold then used by Turkey's commercial banks to meet their regulatory reserve-requirements with the central bank has found its way directly into the CBRT's own holdings anyway (the declining green line on our chart). Notionally that still keeps it separate from Ankara's political executive, but what real hope of the CBRT pleading independence from government ( if ever it could) now that its monetary policy is  once again dancing to Erdogan's crazy tune of  "high interest rates create inflation".
So now, the politics.
The big "repatriation" of Turkey's national gold from London came amid its 2018 currency crisis, when US sanctions against Ankara's arrest of a US pastor on terrorism charges fed what one analyst called President Erdogan's narrative that "the West is attacking us."
With trade tariffs and other sanctions accelerating the flight of foreign currency out of Turkey, the Lira fell 30% versus the Dollar that year. In real Dollar terms, adjusted for inflation, the economy shrank by 10%.
"The Dollar is basically knee-capping countries," said another analyst at the height of the 2018 currency crisis, "if they continue to pursue the policies that Erdogan is seeking to pursue."
The trouble had really begun with 2016's failed coup in Ankara and Istanbul (blamed by Erdogan on a cleric living in exile in the US) and then the 2017 tussles over fighting the US-backed Kurds while pushing back ISIS in Syria, plus the high-stakes gambit of window-shopping for a whole new missile-defense system from Russia, ending with Turkey snubbing its Nato allies and going ahead with a purchase and delivery of S-400s last year.
Little wonder then if Erdogan's AKP government of would-be troublemakers, may-be dictators and could-be kleptocrats grew worried that they might soon face even nastier sanctions from the sanctimonious West. And it's hard to believe that Erdogan's strong (and very rare) friendship with Venezuela's murderous Nicolas Maduro didn't give the cue.
The Bank of England – perhaps learning its lesson from 1939 – has said since 2018 in public and no doubt before then to its Latin American client that it won't hand over what little of Venezuela's gold still remains in London to Maduro's twice-elected, now-dictatorial regime.
As the High Court in London said earlier this year, the social and economic catastrophe Maduro has caused (plus the murder squads working to keep him in power) means that the UK government no longer recognizes him as the rightful President of Venezuela. So he cannot claim or use assets belonging to the nation he is destroying. (Well, not unless the Court of Appeal's big October question-mark over that decision now leads to a U-turn in UK government policy on the matter.)
Erdogan is also threatening court action, only this time defending himself personally:
The potential lawsuit doesn't apparently refer to Charlie Hebdo's more famous and (so far) more deadly cartoons, but to printing a crude (and pointlessly unfunny) caricature of Turkey's thin-skinned president himself.
Outside the civil courts, and more urgently here in late-October 2020, Erdogan might even fear that defeat for Donald Trump in next week's US elections could unleash all kinds of legal trouble for him as well...
...thanks to the long-rumbling scandal over Turkish banks helping Iran dodge US sanctions by buying oil with gold.
All this is certainly part of the background, if not the only piece of the puzzle that matters.
But if politics was the root cause for Turkey pulling almost all of its nationalized gold held in London back home, why stay so much quieter about it than, say, Poland pulling gold from London last year or the Dutch National Bank taking some of its gold for a short drive around Haarlem last month?
Gold held in custody at the Bank of England (tonnes)
Turkey's apparent exit from BoE storage certainly showed up as a dent in the London custodian's 2018-2019 data.
Some 334 tonnes of gold left the vaults beneath Threadneedle Street in 2018. Turkey accounted for more than 4/5ths of that withdrawal.
But the UK central bank's data say it then recovered that much and plenty more besides, if not regaining the (series) record levels of early 2013 before seeing a second, smaller outflow since the Covid Crisis' first wave crested this April.
Who else is now pulling metal out of London, we don't know, nor why. But lots of far less dictatorial governments have meantime made a much bigger fuss about shuffling much smaller quantities of gold around than Turkey...
...allowing armchair pundits and other outside observers to generate heat, not light, in columns warning of new geopolitical doom 'n gloom.
So with the true story of Turkey's gold repatriation from London still untold, what does all this matter to private investors and savers like you?
Turkish Liras per US Dollar, last 10 years. Source:
First, if you're right to worry about some kind of economic or social crisis at home, you're right to keep a chunk of your money elsewhere. As overseas assets go, physical gold in a high-security vault with instant liquidity 24/7 is hard to beat. Expropriating cash-on-deposit through a "banking bail in" is easy. Stealing physical property held in a foreign country is not.
Second, and while gold prices tend to do well when other things do badly, using BullionVault it costs no more also to spread a little of your geographical risk when you diversify your investment holdings. Why not choose Zurich gold if you live in the US...? Or London gold if you live in the Eurozone? Or Singapore if you live the Swiss mountains?
Third and last, all those piles of central-bank gold – whether in London, Istanbul, Moscow or at the New York Fed and Fort Knox – don't actually count for much. Not compared to more boring and technical things like interest-rate policy versus inflation, the credibility of central-bank independence, and the size of government deficit spending.
Yes, that probably spells trouble for investors and savers pretty much everywhere right now. It also explains the relentless decline of the Turkish Lira over the last decade, despite the CBRT's clever move to boost its gold reserves. Or think about the troubles heaped on savers in Russia despite its world-beating central-bank gold hoarding under Vladimir Putin's strong-man direction.
You want the security, liquidity and diversification which gold can offer? Those are the 3 reasons why central banks buy and hold the stuff. But to protect your own savings, you need to buy it directly and own it yourself.
Back in Ankara meantime, the Central Bank of the Republic of Turkey is already selling down some of its gold reserves – the 11th largest nationalized hoard after the giants of the US, Germany, Italy, France, Russia and China. And you'll never guess who to!
Data released on Tuesday show the CBRT selling 45.3 tonnes of bullion bars in September to commercial banks, who then continued to hold that gold on the central bank's balancesheet as part of their required reserves, that clever policy introduced in 2012.
It's done nothing to stop the Lira crashing or inflation hitting Turkey's citizens however. Massive stockpiles in central-bank vaults won't do anything to help defend your savings if interest rates are cut and held way below inflation, or if the government starts upsetting friends and enemies alike across the rest of the world, sounding more belligerent and desperate each day.
Last month's sale of gold bars raised $2.6bn for the CBRT without affecting its headline bullion-reserve figure of 691 tonnes. But after building this hoard with direct purchases and that clever trick with commercial-bank reserves, Ankara could be on the verge of using its gold to try supporting the Lira, selling it to raise Dollars or Euros or Sterling which it then sells for Lira in the hope of stemming the crash.
Monday alone saw Turkish state-run banks sell $800m for Liras, adding to the tens of billions of Dollars already thrown out of the central bank's reserves to try to supporting Turkey's currency in the market. But no luck.
How long before Turkey's national gold reserves really start hitting the slab?

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver, platinum and palladium market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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