Giorgos Iliopoulos: Ankara’s gold and the Devil’s Triangle

Entering the last two months of 2020, Turkey is desperately trying to face its entry into a financial “Devil’s Triangle”, with its peaks being central bank interest rates, inflation (although officially at 11.90%, in reality, it is moving towards 40%) and exchange rates.

At the beginning of November, the Turkish lira broke the 8.5: 1 ratio against the US dollar and the ratio of 10: 1 to the European single currency, having depreciated by 30% and 35% respectively since the beginning of the year. In addition, the 10: 1 exchange rate against the Euro has a symbolic significance for Turkish public opinion, the business community, and economists, mainly due to its purely psychological effects.

The steady rise in foreign exchange risk, even at extremely dangerous levels, coincides with a period in which the Turkish president is ousting his central banker by presidential decree, in a desperate attempt to distance himself from any responsibility for the catastrophic management of the crisis. In addition, a day later, the finance minister, Erdogan’s son-in-law and spokesman Albayrak, resigned, suggesting that moves in the finance staff were aimed, in a first phase, at least, at supporting the currency.

On the inflation front, while the official rate is given at 11.90%, the real according to Johns Hopkins University, is moving towards the levels of 40% from the beginning of 2019, a fact that places the country in the top 10 in the world, among those attempting to survive in an environment of hyperinflation. Despite the fact that the continuous devaluation of the currency negatively affects the chronic high inflation, as well as the business activity in the country, the Turkish president insists almost paranoically on the choices of low-interest rates.

This is perhaps the only field in which he does not behave unpredictably, having often demonized interest rates and their use in the fight against inflation. His cautious stance keeps interest rates (10.25%) significantly lower than official inflation despite their recent rise, although Finance Minister Albayrak insisted until the last minute (he resigned on November 8) that the country has need of a competitive currency to expand its exports.

On the other hand, both ostentatiously ignore the fact that, for example, in the automotive, textile, or electrical appliance industries, raw materials, as well as basic components and devices, are always imported and paid for in foreign currency, while the same is true in the field of energy.

Gold, the last line of defense?

On June 30, 2020, Turkish gold reserves reached 583 tons, although in the third quarter they decreased by 23, which were liquidated to support the Turkish currency in foreign exchange markets. The only other country to reduce gold reserves in the same period (though for different reasons) is Uzbekistan, which liquidated 35 tonnes. Based on the price of gold on September 30, 2020, which stands at 75,079.77 dollars per kilo, the value of 560 tons reaches 42 billion.

However, gold production in Turkey intensified in 2019, reaching 38 tons and is expected to reach 45 tons in 2020. By 2017, Turkish gold, which then reached 564.7 tons, were distributed at 450.0 tons which are held at the Bank of England, 68.7 tonnes at the Bank for International Settlements in Switzerland, 23.7 tonnes at the Central Bank of Turkey, and 22.3 tonnes at the Istanbul Stock Exchange. Also, by the end of 2016, 40.0 tons were kept at the US Federal Reserve, were withdrawn and transferred to London.

At that time, tensions in the Erdoğan regime’s relations with the US government and especially the pending lawsuits of Turkish banks with the US judiciary, due to the smuggling of gold from Iran through Halkbank, forced its relocation for security reasons. In 2019, the lion’s share (470 tons) ended up on the Istanbul Stock Exchange, with the Bank of England holding about 50 tons (of which 43 belong to Turkish commercial banks) and the Central Bank of Turkey another 30.

The continuing rise in foreign exchange risk, combined with attacks on the Turkish currency, forced the Erdoğan regime to transfer almost 82% of its gold reserves to the Istanbul Stock Exchange. The move betrays the fact that the main purpose is to support the currency by covering up as much as possible and delaying liquidations (which, of course, are not hidden in the London Stock Exchange).

The reason why most of the gold had remained with the Bank of England stems from the fact that its price is set in London and is particularly convenient when one intends to liquidate some of it since there, there is a purity guarantee is provided by a recognized body. However, even after the decision of 2018 to keep the gold of Venezuela in London, due to the authoritarian regime of Maduro, the Turkish president, and his staff decided to transfer the gold to Turkey for security reasons, in order to avoid such a possibility.

Aiming at sequestered gold

Since mid-September, however, all six systemic banks in Turkey have been moving in parallel to collecting gold, developing new systems to persuade citizens to transfer the gold they hold in any form (coins, bars, or jewelry) to their bank accounts. According to the former finance minister, Turkish citizens hold the equivalent of 3,000 tons of gold for security reasons, although experienced analysts estimate that its calculations are rather exaggerated and the actual size remains drastically smaller.

Their tactics appear quite tempting once they work with a network of certified jewelers, which now accepts and values ​​gold directly, informing banks about customers so that they can credit their accounts to new gold accounts, respectively. In the past, and especially after the big attack of 2018 on the Turkish currency, starting with the case of the American pastor, the Ministry of Finance encouraged the purchases of gold by citizens, in order to limit the foreign exchange purchases and the pressures on the national currency. The tactic was aimed at preventing the sale of the Turkish lira and converting them mainly into dollars in the hope of stabilizing the national currency, turning individuals to gold markets.

However, the new decision led to the opposite result, due to the fact that citizens rush to use the network not to deposit valuables in gold, but to turn their savings from Turkish lira into gold, into new accounts. The precious metal market frenzy is reflected in the fact that in just 3 weeks to the end of October, $ 25 billion was spent on gold purchases by individuals, raising the total to $ 220 billion over the decade and dashing the new supposedly effective measures.

In the maelstrom of the markets

Despite recent reshuffles in Ankara’s financial staff, the country remains extremely vulnerable and the current exchange rate slump tends to crystallize into a dire balance of payments crisis. In defiance of the data and escalating credit risks, the country’s financial institutions appear reluctant or unable to manage the almost deadly challenges. In addition, Turkish foreign exchange reserves, which for many years had been a source of financial power, are disappearing, putting unbearable pressure on the system.

In fact, the Turkish press is leaking the news that the main reason for Berat Albayrak’s removal stems from the fact that he misled the Turkish president with false information about the size of foreign exchange reserves (which, with the exception of gold, do not exist). However, his replacement, Lutfi Elvan is also considered loyal to the Turkish president and it remains doubtful whether and to what extent he will move independently and contrary to Erdoğan’s intentions.

The evolution of Turkish foreign currency reserves as given by the country’s central bank. But according to Goldman Sachs, at the end of August, they amounted to $ 38.6 billion, at the end of September to $ 36.4 billion, and at the end of October to $ 28.5 billion, which includes the value of 30 tons of gold of the central bank.

The maintenance of the negative image reflects the fact that the econometric figures are deteriorating at an accelerating rate and even more intensely compared to the forecasts of the previous year. It also reflects the inability of the competent bodies to deal with the impending balance of payments crisis.

Geopolitical danger

At the same time, although they are clearly unrelated, the situation is deteriorating in the area of ​​increased geopolitical risk, caused by Turkey’s troubled relations with the EU, the US, Israel, the Arab world (excluding Qatar), as well as its involvement on fronts such as the Caucasus, the Aegean, the Eastern Mediterranean, Libya, and Syria. Geopolitical deterioration, however, is negatively priced by markets that hate uncertainty and asymmetric risk.

During 2020, Turkey has so far performed the worst in three consecutive quarters, among emerging markets. The rate of depletion of its foreign exchange reserves is moving faster than any other developing economy, mainly due to the fact that Ankara has been drawn into a completely ineffective attempt to support the national currency.

Reversing the trend requires particularly dramatic and spectacular developments, such as the ousting of the Turkish president from power or recourse to the IMF, although for the time being options for this form of extremism are likely to be ruled out. But they may be on the horizon in the event that changes in the financial staff and a possible government reshuffle do not yield the expected benefits.