Major Shift for a Major Gold Buyer! Turkey's Central Bank Sells $8 Billion in Gold Amid Iran War

In the two weeks following the outbreak of the Iran war, the Central Bank of Turkey sold and utilized approximately 60 tons of gold through swap operations, valued at over $8 billion, putting downward pressure on gold prices. According to recently released data, Turkey's central bank gold reserves decreased by 6 tons in the week of March 13 and by another 52.4 tons in the week of March 20, indicating a substantial drop in gold holdings. According to people familiar with the matter, a portion was sold directly, while the majority was used through swap agreements to obtain foreign exchange or lira liquidity: According to Iris Cibre, founder of Istanbul-based Phoenix Consultancy, Turkish officials have tapped about $135 billion of the central bank's gold reserves, using sales and gold swap arrangements to meet liquidity needs and stabilize domestic markets. She estimated total sales at 58.4 tons, with more than half executed via overseas "gold-for-FX" swaps. This move comes as Turkey's “disinflation” strategy is under pressure. The strategy relies heavily on maintaining a stable lira exchange rate or a gradual depreciation, typically through foreign exchange interventions by state-owned banks. However, since the outbreak of the Iran conflict, rising energy import costs and increased demand for US dollars have made this strategy harder to maintain. This scale exceeds the gold ETF outflows during the same period. According to Bloomberg data, gold ETFs saw outflows of about 43 tons in the same two weeks. ETFs are one of the primary ways for institutional and retail investors to allocate to gold. Bloomberg reported on Tuesday that the Central Bank of Turkey is discussing utilizing gold reserves through trading in the London market to prevent the lira from further significant depreciation due to the war. The news briefly caused global spot gold prices to turn from a gain to a loss that day. This sale marks a clear shift in Turkey's policy. Over the past decade, Turkey has been one of the world's most active gold buyers, aiming to reduce dependence on dollar-denominated assets. Gold prices have fallen by about 15% this month, following profit-taking by investors after the significant rally since last year. Daniel Ghali, a commodities strategist at TD Securities, stated that the economic shock from the Iran war might weaken gold demand from some central banks while forcing others to sell gold reserves to meet dollar-denominated obligations. While direct gold sales are not impossible, the overall trend of central banks increasing gold holdings is expected to slow significantly in the short term. For central banks, it is not uncommon to sell spot gold while simultaneously agreeing to a future repurchase via swap agreements; this effectively amounts to using gold as collateral to obtain low-cost dollar financing.