Why did Turkey sell nearly 100 tonnes of gold in April and March?

(Kitco News)

After buying more gold than any other central bank in 2022, Turkey went on a selling spree, offloading 81 tonnes in April and 15 tonnes in March.

Analysts point to surging domestic demand and limited gold imports as the reasons for this new trend.

The country’s official gold reserves fell by 80.8 tonnes in April to 491.2 tonnes, said World Gold Council’s (WGC) senior analyst Krishan Gopaul, citing data from the Central Bank of Turkey.

“The gold was sold into the domestic market to meet local demand,” Gopaul said in a Twitter post.

Also, the central bank’s foreign currency reserves dropped by 15% to $9.5 billion from the end of March to May 12, Financial Times reported, citing the central bank’s data.

As noted in this FT article, based on data from the Central Bank of Turkey we estimate that official #gold reserves (central bank + Treasury) fell by 80.8 tonnes in April, to 491.2 tonnes. The gold was sold into the domestic market to meet local demand.https://t.co/QtFSVWXBWU

— Krishan Gopaul (@KrishanGopaul) May 19, 2023

This was in the weeks before Turkey’s general election as Recep Tayyip Erdogan’s government worked to bolster the economy and local currency ahead of the polls.

The sale of gold comes after the Central Bank of Turkey bought the most out of all central banks in 2022 as it searched for protection against unchecked inflation. Turkey’s official gold reserves rose by 148 tonnes to 542 tonnes last year, marking the highest level on record.

Turkey’s domestic market has also seen a surge in gold demand in the past year as citizens embraced the precious metal as a hedge against inflation and local currency devaluation. At one point in 2022, inflation was running at over 85%.

Rising gold demand triggered a jump in gold imports that began to weigh on Turkey’s current-account deficit, which widened to record levels in January.

In February, Turkey introduced steps to curb surging gold imports to improve the deficit situation.

Turkey’s central bank said the country’s current account deficit in March narrowed to $4.5 billion.

However, curbing gold imports does not suppress growing domestic demand, so the country’s central bank decided to sell its gold reserves to meet demand.

“Local demand for gold in Turkey is simply a desire to protect their purchasing power from a declining Lira,” William Stack, financial advisor at Stack Financial Services LLC, told Kitco News. “Gold is a great asset to own when you are in a financial pinch because it can be sold when necessary.”

But the move to offload some of its gold for local consumers has not been a losing scenario for the Turkish central bank, Stack pointed out.

“One reason Turkey is selling is that gold has risen 10% from a year ago, in dollar terms. In Lira-terms, the gain is more dramatic — 70-85%,” he explained. “If Turkey sold gold internationally, it would weaken the Lira further. But when they sell gold to Turkish residents for Lira, it reduces the amount of Lira in the marketplace, thereby helping to strengthen the currency.”

On top of that, selling gold reserves to local consumers limits the ability of citizens to purchase foreign currencies, Stack added. “It brings more control of the Lira’s value to the central government and less influenced by foreign currency speculators,” he noted.

All eyes are now on Sunday’s runoff vote after President Tayyip Erdogan led rival Kemal Kilicdaroglu in the presidential vote on May 14 but fell shy of the 50% needed to win outright.