As Good As Gold: Turkey Uses Bullion To Try To Stabilize Its Economy

  • Written by Zero Hedge
  • Published in Economics

Authored by Simon Constable via Middle East Eye,

Turkey’s economy has been in a tailspin with an inflationary currency, but the country is attempting to use something rare to help stabilise itself: gold.

In late 2011, Turkey started to allow commercial banks to use gold instead of the Turkish lira for their required deposits at the central bank. These deposits are known as reserve requirements and help ensure that the banks are capitalised.

Over the past six-or-so years, Turkey’s central bank has accumulated an additional 400 metric tonnes of gold. That’s a lot of yellow bricks – more than what Britain has - and the sizeable stash has the possibility to take the edge off the crisis.

To put the Turkish gold haul in perspective, there are 10 million ounces of gold – roughly 311 tonnes - at the Bank of England, according to the New York-based financial consulting firm CPM Group.

The burgeoning balance of bullion comes as the result of a change in banking rules made earlier this decade.

“I thought the Turkish thing was pure genius,” says Jeff Christian, founder of CPM Group.

“It was using gold in the way that you should use it.”

In the simplest terms, the tweak to the rules allows gold to be used as a financial asset by the banks. In addition, the new regulation helped flush out a lot of gold that was previously held privately.

“This change allowed the government to get hold of the under-the-mattress gold to help stabilise the banks and the underlying economy,” says Ivo Pezzuto, professor of global economics, entrepreneurship, and disruptive innovation at the International School of Management, Paris, France.

The result of the policy change has been that Turkey’s central bank has seen a huge jump in its apparent gold holdings.

There are now more than 18 million troy ounces of bullion deposited at Turkey’s central bank, up from less than four million before the rule change was introduced in 2011, according to the latest data from CPM Group. There are 32,150.7 troy ounces in a metric tonne.

Private gold deposits into Turkey's central bank

Almost all of the increase came from commercial bank deposits of the metal at the central bank, rather than government purchases to bolster national reserves. 

The Turkish gold, which previously would have languished under the proverbial mattresses, or in private safety deposit boxes, now serves a more useful economic purpose in allowing the banks to make more lira-based loans.

It also helps the banks during times of high inflation.

With inflation running at a 40 percent annualised rate, the value of the gold grows as well when measured in terms of lira. In short, the commercial banks' deposits of gold become worth more and more in terms of the local currency...

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