Turkey, Gold
and US Dollar Hegemony
Introduction
Buy Gold and Lira, Sell Dollars To End “Economic Sabotage” – PM of
Turkey
Gold Imports to Turkey Surge 688% In December
‘Tough Turkey’ today
Affinity for gold to save the day?
Central bank gold demand
Personal accumulation
Country’s gold reserves
Turkey Iran gold conduit
Axis of Evil to Axis of Gold
Conclusion: Gold as an insurance policy
Introduction
With a ‘Hard Brexit’ looking more likely and Trump’s inauguration this week,
2017 is well and truly under way.
What we expect the year to hold is probably not even half of what it
really will. But from what we know, the upcoming French and German elections,
referendums, geopolitical crises, steps towards reverse globalisation and a
third of global government debt yielding negative interest rates, governments
are already prompting central banks and investors to turn to the one asset
that has survived millennia of financial and monetary crises.
One that is highly liquid and convertible into other currencies – gold.
Whilst mining output remains relatively flat and we are at peak
gold, Western central banks have stopped gold sales, large emerging
market economies continue to increase their gold reserves. China, Russia
(both top gold purchasers in 2016) and now Turkey, are the notable players.
Turkey’s President Recep Tayyip Erdogan reminded us of this when he called
on his citizens to buy gold:
“Those who keep dollar or Euro currency under their mattresses should
come and turn them into Liras or gold.”
This has been met by such support that, not only did Turkish gold imports
surge 688% in December, to reach their highest monthly level in two
years but, according to Reuters, “fervent supporters have offered free
haircuts, fish and even tombstones to those who can prove they have done so.”
As a result, in December 2016 imports reached 36.7 tonnes, significantly
more than the 4.65 tonnes seen in the same month in 2015. This accounted for
more than one-third of the country’s annual imports of 106.2 tonnes, more
than double 48.7 tonnes in 2015.
Before 1993, the Turkish gold market was not fully liberalised, since then
the World Gold Council reports that they have seen ‘rapid growth of the
sector’ and this is across all areas relevant to the physical gold market.
Encouragement to buy gold from the likes of Prime Minister Erdogan, who is
very popular with huge swathes of the electorate, is not just a selfless act
to protect citizens’ wealth during uncertain times in Turkey, the Middle
East and across the globe. There are several factors at play here.
These factors should be considered with Turkey’s unique role in the global
gold market, in mind. There is no country positioned in such a way (both
geographically and politically) that plays all three major roles of producer,
buyer and conduit, in the world of gold.
‘Tough Turkey’ today
Since 1950 the country has experienced at least one economic crisis per
decade and today it is no secret that Turkey is struggling under both
economic and political pressures. Along with heightened security concerns
that have damaged the much relied-upon tourism sector, economic growth is
sluggish, inflation is rising and a strong US dollar is not helping matters.
Despite this, Erdogan has recently tried to prevent the central bank from
increasing interest rates.
All measures since taken by the central bank in order to boost liquidity
in the system have lead to short-lived spikes in the Turkish lira. The
Fitch-rating review on the 27th January is expected to downgrade the
country’s credit rating to +BBB, something not even the failed coup made
happen.
The push for support for gold is two-fold, first it is an attempt to boost
trust in the central banking system which is in increasingly dire straights,
the second is to support the underlying currency which is central to the
‘axis of gold’ (h/t Jim Rickards) that is Russia, China, Turkey and Iran.
Both of these things push back against US dollar hegemony.
Gold to save the day?
Turkey’s citizens have long had an affinity to hold physical gold. It is
rarely seen as an investment, few look at it as something that they will
receive a return on. Instead it is a necessity and something that families
hold for wealth preservation and as insurance.
In 2015 the World Gold Council published a report entitled ‘Turkey:
Gold In Action’. Much of the report focused on the imports of the
country:
“At an average of 181 tonnes per annum over the past 10 years, Turkey
is the world’s fourth largest consumer of gold accounting for around 6% of
global consumer demand, and we estimate that Turkish households have accumulated
at least 3,500t of ‘under-the-pillow’ gold.”
Therefore, it was not unusual for citizens to act on the PM’s exhortation
to buy gold when Erdogan made his statement in December. Gold is bought for
insurance, rather than investment, and Erdogan has recognised this.
The fall in the lira has meant a slump in demand in recent years, but this
has changed recently. Whilst Trump’s victory saw the Turkish lira plummet
further, it also drove up gold demand. A move which has been termed the
‘Fear Trade’ by Frank Holmes.
Then Erdogan’s calls for citizens to buy gold not only boosted imports but
also helped to give some respite to the currency’s fall. As a result, the
Turkish lira has found some support. This may seem a little contradictory
given the idea that gold will save the Turkish lira when citizens buy gold.
If the gold has to be imported this puts further pressure on the currency and
widens the trade deficit.
However, it may be that the majority of recycled gold is bought
domestically, which accounts for a large proportion of gold purchases.
Central bank gold demand
The title of this section is misleading. Usually when we talk about
central bank gold demand we are referring to how much the central bank has
purchased for its own reserves. However, when it comes to Turkish central
bank demand they don’t so much need to purchase gold, they just amend policy
in order to accumulate others’ holdings and therefore demand more of the
yellow metal.
According to WGC data, Turkey has the 14th largest amount of central bank
gold reserves with 396.5 tonnes. However, this means little given a
proportion of this includes gold holdings by commercial banks. At the bottom
of the World Gold Council’s official central bank holding’s list they place a
foot note on Turkey, that reads “Gold has been added to Turkey’s balance
sheet as a result of a policy accepting gold in its reserve requirements from
commercial banks.”
This is because in 2012 the Turkish central bank increased the amount of
gold commercial banks could hold as reserves to meet their reserve liability
requirements, to 20%. Any form of gold was accepted as collateral. The
government were looking to mobilise ‘under the pillow gold’. Banks were also
told that gold reserves could not count towards foreign currency liabilities.
The World Gold Council wrote in 2015, “By the end of 2013, commercial
banks held around 250t, equivalent to US$10.4bn, some of which had been put
to work supporting Turkey’s economy. Most of this was from investors
switching Turkish lira and foreign currency into gold accounts. But it also
includes 40t – about US$1.7bn – of Turkey’s “under- the-pillow” stock, which
has been mobilised since mid-2012.”
The 20% was soon increased to 30% and as of September 2016, an additional
5% was permitted, in
order to “…bring out residents’ gold into the economy and to increase
foreign exchange reserves.”
It took until just 2014 for the central bank’s reserves to climb by 350%
from 2011’s figures and saw gold become the top investment option amongst
Turkish citizens’, ahead of real estate.
A central bank paper written in 2014 stated, “the new policy framework…
has been successful in achieving a soft landing in the economy and lessening
the financial stability risks”.
Personal accumulation
Since the liberalisation of the Turkish gold market, local banks have
offered gold accounts for its citizens, however as of 2012 much of the
privately held gold was outside of the banking system. Estimates vary as to
how much is privately held, ranging from 3,500t to 5,000t.
The government has, since 2011 tried a number of routes and incentives to
encourage citizens to get their gold into the banking system, this is part of
the drive to reduce the risk of a liquidity crisis.
As Tim Ash, told the FT, “It’s essentially to further encourage banks to
mop up the considerable gold savings of the population (under the mattress –
might be uncomfortable), deposit these as part of reserve requirements, and
then frees up FX, and potentially I guess lira liquidity when the need
arises.”
The move to mobilise deposits did bring some positives (as mentioned
above) the currency rose, interest rates fell along with the significant
current account deficit, and government bonds were once again made
‘investment grade status.’
The move was seen as such a success that Central Bank governor Erdem Basci
was awarded the Banker’s 2012 ‘Central Banker of the Year award’.
However, overall the ‘scheme’ has had varying results, so reports Metals
Focus, “Although at its peak in June 2013 some 260 tonnes was held in gold
deposit accounts, the bulk of this was made through cash payments, rather
than from gold collected from the public…Furthermore,” “gold held in these
deposits has since fallen sharply, to now stand at around 70 tonnes.”
Interestingly, we should note that despite Erdogan’s calls to support the
lira and gold (and subsequent increases in gold imports) US dollar deposits
by Turkish residents and non-bank companies rose for a third week, last week.
Gold is harder for citizens to move out of the financial system, the view
is likely to be that when the time comes citizens will struggle to get deposits
out of the system and instead they can be used to support the currency and
the banking system.
The move to bring gold into the banking system is likely a move to prevent
a situation whereby banks are unable to meet creditors’ demand for repayment
– a liquidity crisis. This is something the country has been working to avoid
since the 2000/2001 liquidity crisis in Turkey. However, it became something
that looked like happening again in 2011.
The increase in gold reserves is also likely to be designed to counteract
any leaps in domestic gold demand by providing a liquidity pool, so as to try
and reduce the need to import gold and weaken the lira. However, this would
leave banks wide open to a run, should depositors demand their gold back, en
masse. Not impossible to imagine that their gold might not be so easy to get
at in such a situation and a reason that Turkish people should keep some of
their gold in secure storage in vaults internationally.
Country’s gold reserves
Arguably the country doesn’t need to go on a huge gold grab from its
citizens. Turkey is Europe’s largest gold producer. Every year since 2001
gold production has climbed, from 2t in 2001 to 33.5t in 2013.
According to the World Gold Council, the Turkey’s Ministry of Energy &
Natural Resources estimate gold reserves to be 840t, and resources to be as
high as 6,500t. The government continues to encourage growth in the gold
mining sector with well-considered incentive schemes to get mining companies
up and running.
Gold recycling is also well-established in the country and there is strong
supply-chain. With this and it’s growing mining sector it isn’t surprising
that is one of a handful of countries that has more than one LBMA accredited
refinery, an excellent position to be in as the gateway between Europe, Asia
and the Middle East.
Whilst mined amounts may seem small compared to the likes of China, it is
not be sniffed at given the potential resource and established recycling
trade. Considering it’s geographical position and refineries, Turkey’s
homegrown gold may well be very valuable to the country and its allies.
Conduit to Iran
It is not only Turkey’s rumoured plans for the gold it is bringing into
the banking system and refining, that has grabbed the attention of the gold
world but also its relationships and role as a conduit to other
countries building up their gold reserves.
In May 2012 the Turkish Statistical Institute reported that gold sales to
Iran, from Turkey, had increased by over 30 times in the first quarter of the
year, gold exports between the two countries had increased by nine metric
tonnes; in 2011 the amount exported was just 286kg.
Prior to 2012 the country had been a gold importer for 28 of the previous
31 years. It became an exporter when Iran began selling the country gas and
accepted gold bullion as payment. This was, of course, done in order to
circumvent international sanctions.
In 2012, I wrote, “In January it was reported that Turkey were
preparing to bypass UN sanctions by trading with Iran for oil in exchange for
gold…The Turkish government has assured the US that they will reduce oil
imports from the Islamic Republic this year, however total trade increased by
47% in the first quarter of 2012 between the two countries. It is not
surprising Iran has become one of Turkey’s biggest trading partners; the
country benefited heavily from the Iran-Iraq war in 1980-1988, becoming a
trading partner to both parties…
‘…It is this recent surge in trade with Iran which analysts believe
accounts for the tripling in demand by Iran for Turkey’s precious metals,
mainly gold. The longer the Islamic Republic remains isolated, the greater
the trade in Turkish gold, and the longer high prices in the local market are
maintained. Reuters report that the fall in the rial’s value against the
dollar has caused an increase gold investment for savings purposes.”
This trade apparently continues today, explains Jim Rickards:
“Reliable data is not available for Iran, however, exports from Turkey
and Dubai to Iran are significant, and there is good reason to conclude that
Iran is also a rising gold power relative to the size of its economy.”
Axis of Gold
And where does all this lead to? The ‘Axis of Gold’, as entitled by
Rickards. Once again, it is very important to consider Turkey’s geographical
position and allies when it comes to gold demand.
“A major blind spot in U.S. strategic economic doctrine is the
increasing use of physical gold by China, Russia, Iran, Turkey and others
both to avoid the impact of U.S. sanctions and create an offensive
counterweight to U.S. dominance of dollar payment systems…Russia, China,
Turkey, and Iran constitute a new “Axis of Gold” prepared to undermine confidence
in the U.S. dollar.”
This has been confirmed by Erdogan himself, as reported by Hurriyet,
in early December last year. As the Turkish President Erodgan opened a
new mall he took the opportunity to say a few words about the country’s
foreign exchange ideas ‘“I proposed Putin the following: Let’s do our
trade in local currencies. Whatever I buy [from you] I shall pay you in
Russian ruble, and whatever you buy from me make the payment in Turkish
Liras,” said Erdogan on December 3…
The move to accumulate gold in Russia is no secret, and as Putin advisor,
Sergey Glazyev told Russian Insider, in April 2016, ‘The ruble is the
most gold-backed currency in the world’.
The Hurriyet report continues:
He added that he had made the same offer to China and Iran and his offer
was found reasonable. “We have given the necessary instructions to our
central banks and we will try to conduct such [trade] relationships between
us through this way,” Erdogan said.
Erdogan again reiterated his call to Turkish citizens to convert their
foreign exchange into gold or the Turkish Lira. “Those who keep foreign
currency under their mattress should come and turn them into lira or gold,”
he said.’
Conclusion: Gold as an insurance policy
Turkey may well have major issues in many areas of its economy, but it is
positioning itself for the changing of the monetary guard that we are slowly
witnessing around the world, and it is using gold as its insurance and safe
haven in the ongoing and soon to escalate currency wars.
Russia and China are poised for a weakening of the dollar and of the
influence of the last superpower and indeed the potential political and
financial contagion in the EU.
Turkey feels aggreived and sees itself as a victim of “economic
sabotage” and of dollar “hegemony” and largely ignored by the EU when it
comes to the refugee crisis and growing threat of terrorism.
All three countries have shown a strong affinity through gold across all
levels – government, banking system and citizens.
Whether you think of the Turkey in Europe or not, there is no country on
the continent that is able to play all three roles of producer, conduit and
accumulator of gold in the same way that Turkey can.
The US dollar system currently rules the international payments sphere,
but moves to step away from it are already in play by those in the ‘Axis of
gold’. As Jim Rickards has pointed out
“…adversaries do not issue currencies that are potential alternatives
to the dollar because of inadequate rule-of-law, immature bond markets,
primitive capital markets infrastructure, or all three. The only feasible
alternatives to dollar dominance are special drawing rights (SDRs) issued by
the IMF, and gold.”
In an increasingly multi polar world where the heavily indebted, near
bankrupt U.S. economy and by extension the U.S. dollar look
very vulnerable, gold is the ideal currency for those seeking to protect
themselves from the coming decline of the dollar.
This applies for all – for apolitical investors, for U.S. allies and
especially as we have seen for the U.S.’ competitors and adversaries who
are looking to operate beyond the realms of the US-dollar denominated SWIFT
payments and dollar based monetary system.
Gold is highly liquid, cannot fall victim to cyber warfare and is very
difficult to steal or confiscate if owned in the safest ways – allocated and
segregated gold coins and bars in the safest jurisdictions in the world.
It has throughout history and in recent months shown its safe haven
attributes and value as a hedge against dollar and other fiat currencies
weakness and devaluation.
Due to ongoing requests for higher credit and debit card transactions, we
have increased our maximum card transaction sizes from 5,000 to 50,000 GBP,
EUR or USD.
·
You can now lock in prices online and transact immediately for
up to 50,000 (GBP, EUR or USD) on your Visa and Mastercard credit cards
(not American Express) for one transaction
·
We do not limit card payments to 50,000 per day but to 50,000
per individual transaction. This means that clients can do a number of
transactions for 50,000 on a single day. Certain banks may have
restrictions in this regard.
·
In the volatile markets of today, this added liquidity is
advantageous and, to our knowledge, these are the highest credit and debit
card transaction limits in the bullion market. This will be attractive
to investors seeking to lock in prices without having to wait for
funds to clear first.
·
Credit and debit card rates have come down significantly and
are now 1.9% for credit cards and 0.45% for debit cards. Please keep in
mind that this is subject to your own credit card limits.
Gold Prices (LBMA AM)
19 Jan: USD 1,203.35, GBP 976.76 & EUR 1,129.34 per ounce
18 Jan: USD 1,212.50, GBP 984.91 & EUR 1,134.78 per ounce
17 Jan: USD 1,217.50, GBP 1,003.59 & EUR 1,141.65 per ounce
16 Jan: USD 1,202.75, GBP 997.56 & EUR 1,135.40 per ounce
13 Jan: USD 1,196.35, GBP 978.85 & EUR 1,123.25 per ounce
12 Jan: USD 1,206.65, GBP 984.39 & EUR 1,135.82 per ounce
11 Jan: USD 1,187.55, GBP 979.25 & EUR 1,128.41 per ounce
10 Jan: USD 1,183.20, GBP 974.60 & EUR 1,118.12 per ounce
Silver Prices (LBMA)
19 Jan: USD 16.95, GBP 13.75 & EUR 15.89 per ounce
18 Jan: USD 17.12, GBP 13.93 & EUR 16.01 per ounce
17 Jan: USD 17.00, GBP 13.91 & EUR 15.87 per ounce
16 Jan: USD 16.82, GBP 13.94 & EUR 15.87 per ounce
13 Jan: USD 16.76, GBP 13.76 & EUR 15.74 per ounce
12 Jan: USD 16.91, GBP 13.77 & EUR 15.87 per ounce
11 Jan: USD 16.79, GBP 13.84 & EUR 15.96 per ounce
10 Jan: USD 16.66, GBP 13.73 & EUR 15.76 per ounce
