The global energy shock and escalating war in the Middle East have pushed a growing number of countries, including Russia and Poland, to consider selling gold to support their currencies or improve their fiscal positions. And so the central banks have changed the management of gold reserves and prefer to sell rather than buy. According to data from the World Gold Council, last year, net purchases of gold by central banks were around 860 tonnes, a decline of 20% compared to the previous year.
This year, in addition to Türkiye, known sellers include Russia, which sold 15 tons in January and February. Meanwhile, the head of Poland’s central bank recently proposed selling bullion to raise defense funds, although the government opposed the plan. Market participants believe further sales this year could come from oil-importing countries hit by the energy crisis, such as India, or from Central Asian nations with significant gold reserves.
Gold’s sharp decline last month, which belies its traditional status as a safe haven and hedge against inflation, also reflects four weeks of outflows from gold exchange-traded funds (ETFs) since the war began as some investors rushed to take profits. Meanwhile, a growing number of central banks are choosing to repatriate their gold, including France, which last week said it no longer holds gold in the United States. In this panorama, the exception is the People’s Bank of China which purchased 160,000 ounces in March, its largest purchase recorded in over a year.
Turkey has sold half of its gold reserves
The most emblematic case of the new trend, however, is Turkey, which has sold or lent 20 billion dollars in gold since the start of the war in Iran, in a frenetic series of bullion sales that has contributed to the largest monthly decline in the price of the metal since 2008. According to an analysis by the consultancy firm Metals Focus based on official data, and reported by the Financial Times, the Central Bank of the Republic of Turkey sold 52 tons of gold between February 27 and March 27, bringing the Turkish central bank’s net reserves to 440 tons, the lowest level in more than two years. Over the same period, the central bank also arranged around 79 tonnes of gold swaps involving the leasing of gold bullion to generate income and increase downward pressure on prices of the precious metal by increasing available supply in markets while it was busy supporting the value of the lira.
The gold sales underline Turkey’s determination to support the lira, as currency stability is a central pillar of the country’s more than two-year campaign to curb inflation, currently at 31%. According to calculations based on official data from Burumcekci Research and Consulting, Turkey’s net international reserves have decreased by almost half to $46 billion since the start of the war in Iran. More broadly, while central banks have been a major driver of gold’s multi-year rally that pushed prices to an all-time high of more than $5,500 an ounce in January, a recent change in their behavior has pushed gold prices lower: Last month, prices fell 11.5%, the worst month for gold in 18 years.