Are Central Banks Selling Gold?

Gold holdings of Turkey's central bank are down a lot, but Turkey is an outlier in EM

When the war with Iran began, I wrote a series of pieces about which countries would benefit from higher oil prices and who’d be hurt. Turkey was top of the list in terms of countries getting hurt, because it’s a large oil importer and because it heavily manages the exchange rate, which forces the central bank to prop up the Lira when a spike in oil prices - like now - exerts depreciation pressure.

That isn’t how things have played out so far. The Turkish Lira has fallen about one percent against the Dollar since the end of February, which is less than the Brazilian Real (down two percent) or the Chilean Peso (down five percent). However, in foreign exchange appearances can be deceiving, because some countries are more aggressive about managing their exchange rates than others. Turkey is one of these. In fact, its central bank has been intervening so heavily that it’s had to tap its gold holdings.

The chart above shows weekly data for holdings of gold (in metric tons) by Turkey’s central bank. Depreciation pressure on the Lira has been so big that the central bank has tapped 50 tons of its gold holdings. It’s unlikely all of this was sold, given prices have been falling recently. Some of this drop most likely reflects gold being used as collateral for actual foreign exchange, giving the central bank more Dollars and Euros to defend the Lira. Regardless, depreciation pressure on the Lira has been immense.

The big question is whether Turkey is an idiosyncratic case or whether it reflects more broadly on what’s going on across EM. My best guess is that Turkey’s exchange rate makes it an outlier. Most EMs allow their currencies to float freely, so there’s no need to intervene as heavily as Turkey. And even if they intervened, they’ll have used liquid foreign exchange instead of tapping their gold holdings, especially with prices falling. So I’m still doubtful central banks are behind the recent fall in gold prices.

Of course, it’s true that most Gulf countries peg their currencies to the Dollar, most obviously Saudi Arabia. But - as I noted in a recent post - it’s likely that Saudi export revenues from oil have risen since the outbreak of hostilities because the big rise in oil prices more than offsets the hit from somewhat lower export volumes.