Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Forget Germany, Check Out Turkey's Central-Bank Gold

Commodities / Gold and Silver 2013 Jan 24, 2013 - 02:56 PM GMT

By: Adrian_Ash

Commodities

Now here's a central bank really putting gold to good use...

AMID the brouhaha over Germany's gold reserves at the Bundesbank, there's another central bank using gold actively to bolster its currency and financial stability.

The strategy looks the same – sitting on big stockpiles of the stuff. But the aim differs, because gold is much closer to the everyday financial system. The tactics differ too. Because the central bank hasn't bought and paid for this gold. Private citizens have.


"Gold-based deposit accounts [in Turkey] surged 15% this year through the end of July," explained BusinessWeek back in October, "three times the increase in standard savings accounts."

"Although much criticised for its use of 'unconventional measures'," the Financial Times added in December, "few would argue that the decision last year by Turkey's central bank to allow the country’s banks to buy gold was anything less than a roaring success."

Buying gold isn't quite right. Starting in October 2011, the central bank began allowing commercial banks to hold a portion of their "required reserves" – needed to reassure depositors and other creditors they had plenty of money to hand – in physical gold bullion. Starting at 10%, that proportion was then raised to 30%.

Private citizens were similarly encouraged to hold their gold on deposit with their banks. That gold was thus transferred to the central bank's balancesheet. Et voila! Privately-owned gold now backed the nation's finances. A smart idea, which has coincided with Turkey's currency rising, interest rates falling, huge current-account shrinking, and government bonds regaining "investment grade" status.

Publicly targeting some of Turkey's estimated 2,200 tonnes of "under-the-pillow" gold, currently worth some $119 billion, the CBRT's governor Erdem Basci has meantime been awarded The Banker magazine's prestigious "Central Banker of the Year 2012" award. But with everything going so swimmingly, might Turkey risk over-heating?

Well, the CBRT this week cut its key interest rates – and raised the amount of gold which commercial banks choosing to use bullion as required reserves must hold with it. That fine-tuning is a bid to a) deter foreign investors from buying Lira and so pushing it Lira too high, too fast, and b) prevent those inflows boosting the pace of domestic credit growth by giving the banks too much money to play with.

See, with Turkey's mess of the early 2000s now fading from memory (it knocked 6 zeroes off the Lira in 2005), the currency recently neared 12-month highs against both the US Dollar and the Euro. "Amid accelerating capital inflows" from foreign investors, said the central bank in Tuesday's policy statement, "recent credit growth has been faster than envisaged.

"In order to contain the risks on financial stability, the proper policy would be to keep interest rates at low levels while continuing...to implement a measured tightening [of credit] through reserve requirements."

Reporting from Istanbul, Reuters notes that the CBRT raised its "reserve option coefficients" for Gold Bullion and non-Lira currencies. In other words, it forced commercial lenders who choose to hold a proportion of their cash reserves in gold or foreign exchange to deposit more with the central bank.

"The measures will transfer as much as $2.9 billion in foreign exchange and gold from lenders to the central bank's reserves," says Bloomberg, "as well as withdrawing 300 million Liras from local-currency markets."

Analysts at Goldman Sachs had forecast this move last week, noting after comments from Turkish central bank governor Basci – and also noting last month's rise of 2% in the Lira's exchange rate to the Dollar – that CBRT "has shifted focus towards the financial stability risks posed by accelerating capital inflows."

Using interest rates and other tools, it would "lean against these inflows and their subsequent FX appreciation pressures," said Goldman's analysts. The CBTR this week cut its annualized rate for overnight loans to 8.75%. That compares with the 12% charged 12 months ago, when inflation ran to double-digits and the Lira was still struggling to find its floor, says the Wall Street Journal's Emerging Europe blog.

Can you imagine such a policy, let alone such a turnaround. Of course, not all of Turkey's gold policy can be fully guessed by analysts outside, and there are still plenty of risks to Turkey's growth and stability too. Not least its current account deficit...perhaps the 7th worst in 2012 at $59 billion (IMF forecast).

Still, that was down from second place – behind the ever-winning United States of course – in 2011. That spot is now taken by the dear old United Kingdom, a nation which all-too famously sold half its national gold reserves at multi-decade lows between 1999 and 2002. A decade later our deficit with the rest of the world yawned above $80 billion last year.

The UK could of course play a similar gambit to Turkey. Indeed, Bullion Vault set forth just such a modest proposal to Parliament early last year.

"Make private gold deposited at the Bank of England free of capital gains tax. This would dramatically increase the financial firepower of the bank at a time when our commercial banks need support, as might our currency very soon."

Some hope! And in the absence of a central bank, or government, willing or able to tackle stability on your behalf, UK savers might want to note that gold did for Turkish households back when the Lira collapsed – time and again – on the currency market.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in