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The governor of the central bank changed three times, and gold reserves increased fivefold

27 March 2021


When the currency depreciates sharply, people will miss hard currencies like gold. Turks are currently calculating how many gold bars and coins are hidden under their mattresses.


The Turkish lira saw a double-digit drop in recent days, and the governor of the Turkish central bank was suddenly replaced. After Turkey raised interest rates to a high of nearly 20%, Turkish President Erdogan replaced the hawkish central bank governor Alba and appointed Kafjoglu, a former bank official and member of the ruling party, as the new central bank president.


This is the third time Erdogan has suddenly replaced the president of the central bank since mid-2019. Alba had only worked for more than 5 months before. Although the office of the central bank governor is constantly changing, an important policy guideline has never changed. Over the past three years, the Turkish Central Bank’s gold reserves have more than five times increased, from 116.1 tons in the first quarter of 2017 to 716.3 tons in the fourth quarter of last year. During this period, Turkey has continuously become the largest gold buyer of the year. For example, its official gold reserves increased by 134.5 tons last year, surpassing any other country in the world. At present, its gold reserves have surpassed India, becoming the ninth largest gold reserve country in the world.


It is worth noting that the current figures for Turkey’s official gold reserves do not include gold held by commercial banks in the central bank in accordance with the country’s central bank reserve option mechanism (ROM). If you add more than 300 tons of holdings under the ROM mechanism, Turkey's official gold reserves can exceed the 1,000-ton mark.


In view of the dovish views of Turkey’s new central bank governor and the latest damage to the credibility of the central bank, many financial institutions have already expected the lira and Turkish assets to fall sharply. However, gold currently accounts for 46.5% of Turkey’s foreign exchange reserves. Although it has fallen by about a percentage point from the high point in the middle of last year, it can still build a barrier to defend the lira.


In fact, in the second half of last year, Turkey used part of its gold reserves for the exchange rate of the lira. After the Central Bank of Turkey conducted two gold sales in September and November last year, its gold reserves dropped by 36.3 tons. These two gold sales are the biggest monthly reduction since it resumed normal gold purchases in May 2017. Of course, some of this part of the gold also flowed into the local commercial banks, reflecting the lack of confidence in the currency and hoarding gold to hedge against inflation.


As Turkey has long been the world's fourth largest consumer of gold, it is estimated that private ownership of more than 3,500 tons of gold. Generations of Turkish depositors have used gold as an effective tool against inflationary inflation and weak currency. Data from the World Gold Council show that the demand for gold bars and coins in Turkey more than doubled last year, reaching a record high of 121 tons. Strong growth momentum has been maintained throughout the year, and the sharp drop in the price of the lira underlying gold has triggered bargain hunting. Judging from the current situation, those who bought gold at that time effectively avoided the risk of continued depreciation of the lira this year.


Saving gold for thousands of days, using gold for a while, whether it is the Turkish central bank or the private sector, in the case of large currency fluctuations, it is time to call on gold to guard wealth. After all, time has proved that this unchanging metal is more reliable than the fickle central bank governor.