When investors put their money in something they are almost always looking for an asset that appreciates more and fast. So if you invested in gold in the U.S, your returns would not be as impressive as someone who had bought gold using the Turkish Lira. Your investment would be worth considerably more. Your investment would have risen 2.58 times or from 2,805 to 7,226. This is because the Lira has taken a massive knock. The Turkish currency has deteriorated from 2.33 to the U.S dollar to 6.04.

 

To stem the catastrophe of a currency that could be rendered useless because of political tensions and stringent tariffs that the U.S has imposed on the country, Turkish Banks and commercial lenders have been withdrawing their gold reserves to avert a liquidity crisis as the lira continued to plunge. The central bank of Turkey reported that its gold holdings have dropped to 15.5 million ounces, meaning that investors have withdrawn a fifth of the gold that was in their vaults.

 

The most drastic drop happened in August when the Lira/ gold crisis reached its peak. Turkish banks and other lenders cashed close to $4.5 billion worth of their gold in the past three months to prevent running into a liquidity problem amid the plummeting Lira. The biggest concern for banks is their external debt burden. This is evident in their rising bank bond yields.

 

The sharp drop in the Lira was triggered by a combination of things. The first was concern over President Erdogan monetary policy. He has been supportive of lower interest rates, which in turn encourages more lending from banks and private spending. The other concern was the seemingly independence of the country’s Central Bank. In most countries, central banks aren’t independent of the government as the Turkish central bank. And then came the row with the U.S with the American President being vocal about how he doesn’t like Erdogan’s management of his government sentiments that were fueled by Erdogan’s refusal to release the U.S Pastor, Andrew Brunson jailed on allegations that he was involved in a supposed coup attempt. The Lira subsequently came tumbling down, it fell almost 40% against the Lira this summer.

 

The Central Bank’s gold holdings fell by close to 20% since mid-June to 15.5 million ounces. This was followed by the Central bank’s decision to reduce the required reserve for banks by 4% for their foreign liabilities over 3 years. This translates as 10 billion, 6 Billion U.S dollars and 3 Billion dollar equivalents in gold. This is money banks will need to repay their foreign debt. The thing is banks borrow in hard currency, they hedge their dollar liabilities with gold deposits to survive the exact situation the country faces now with a plunging lira. They have to sell to shore up finances so they can service the debt they have. The short term debt that is due by September 2019 is $118 billion and of that 44% accrues to private institutions and 15% accrues to publicly-owned financial institutions.

Sources:

  1. https://www.bloomberg.com/news/articles/2018-09-14/turkey-banks-tap-4-5-billion-gold-reserves-to-shore-up-finances
  2. https://seekingalpha.com/article/4204421-turkey-can-teach-us-gold