Spotlight on the Turkish Gold Market 2021
Chapter 3 - Official Sector
- CBRT’s gross gold reserves, which stood at 436t in 2017, have risen sharply to reach 716t by end-2020.
- However, its own reserves, which remained stable at 115.8t until 5th May 2017, peaked at 440.6t in July 2020, before dropping to 334.7t by the end of last year.
- The Treasury’s issuance of gold bonds and lease certificates were reflected in the CBRT’s gross gold reserves, reaching 60t by the end of 2020.
Turkey’s long standing and increasingly active participation in the gold market extends to the country’s central bank. Over the past two decades it has become increasingly involved, whether this relates to outright purchases (and more recently disposals), or in terms of using gold to help boost commercial bank liquidity.
In Turkey, the CBRT’s core activities, in terms of its management of its gold and foreign exchange reserves, are guided by Article 53 of the CBRT Law. Specifically for gold, this governs how the Bank may execute forward and/ or spot purchases and sales of gold and lending/borrowing transactions.
Until September 2011, the CBRT’s gross gold reserves (as reported to the IMF) had remained essentially flat at 116.1t. Since then, its gross holdings have risen sharply, to reach 716.3t by end-2020. The increase largely reflects the adoption of more gold friendly policies by the Turkish government, which has increasingly promoted the role of gold in the financial system, while at the same time trying to lessen the country’s dependence on the dollar. To help achieve these goals, aside from the CBRT making direct gold purchases from local and international markets, it has increasingly used other tools, including the Gold Monetisation Scheme, the Treasury’s gold bond and gold lease certificate issuances and the CBRT’s gold swaps programme with local commercial banks.
1. CBRT’s Own Reserves
Focussing on the CBRT’s own reserves, it was not until May 2017 that the central bank started to raise its holdings. In other words, the 320t increase in the CBRT’s gross holdings between October 2011 and April 2017 was driven by the commercial banks’ gold held through the reserve option mechanism (ROM).
From 115.8t in April 2017, the CBRT’s own holdings peaked at 440.6t in July 2020. This was followed by a period of disposals during August-December which totalled over 105t, these accounting for the largest share of global central bank sales at that time. This left the CBRT’s own reserves at 334.7t by end-2020. These sales were largely driven by a deteriorating economic backdrop and currency crisis. After Turkish foreign exchange reserves dropped to a multi-decade low over the summer, some gold holdings are believed to have been mobilised to support the lira and/or repay international debt.
Part of the growth in the CBRT’s gross gold reserves also reflected the issuance of gold bonds and lease certificates by the Turkish Treasury, as gold collected via these programmes was transferred to the central bank’s account. In September 2017, the Treasury decided to issue both an interest-bearing gold bond and also a gold sukuk (the Islamic equivalent of a bond, generating a return while still being compliant under Sharia law). Both were sold to the public in return for their physical gold.
Under this mechanism the public deposited their gold with the state-owned Ziraat Bank and, in return, the Treasury issued a gold bond or sukuk, both of which pay dividends in Turkish lira (TL) at regular intervals. At the point of maturity, investors have had two options. First, they can take back their gold in the form of Republic coins struck by the State Mint, Darphane. Alternatively, these instruments can be sold back before maturity to the Treasury with payment made in TL. Starting with a volume of 1.9t in October 2017 and, with the subsequent involvement of financial institutions, the total amount of these two instruments reached 60t by the end of 2020; with further auctions in 2021 boosting this figure to 94.7t by end-June 2021.
CBRT’s Gross Gold Holdings, by Location (1)
Source: CBRT Annual Financial Statements for the year ended 31 December 2020
1. All holdings are taken from the CBRT’s Annual Financial Statements without any adjustment
2. The reported CBRT’s own gold includes gold swap with non-official entities. This explains why end-year figure in this table is higher than Metals Focus’ estimate (334.7t at end-2020)
3. Under the Reserve Option Mechanism (ROM)
3. Reserve Option Mechanism (ROM)
The reserve option mechanism (ROM) has its roots in gold banking’s evolution in Turkey. For many years, this was a niche area in the Turkish financial sector, with only one bank working on Islamic finance principles, Kuveyt Turk Katılım Bankası, which introduced the first gold account in Turkey. However, there was little other commercial bank involvement until the CBRT started its gold monetisation scheme in 2012 through the ROM. This was first introduced in 2011 and its purpose was communicated by the CBRT as to limit the negative effects of excessive volatility of capital flows on the country’s macroeconomic and financial stability, as well as also boosting the CBRT’s gross gold reserves.
After the gold monetisation scheme was launched, banks started to use the ROM more effectively. Simply put, as part of the ROM banks are allowed to hold a certain ratio of Turkish lira reserve requirements as foreign exchange and/or gold in increasing tranches. This affords an opportunity to use gold as a tool to create more room for lira credit lines. As a result, gold collected through the country’s gold monetisation scheme and through gold banking accounts (offered by Turkish commercial banks) are channelled towards this use.
In terms of how the ROM applies to gold; since end-2012 and until 3rd October 2016, a maximum of 30% (known as the reserve option coefficient, ROC) of a bank’s reserve liabilities could be offset against gold. This 30% was broken down into three tranches, each involving a different reserve option ratio. For the first 20% bracket, the ratio was set at 1.2, which meant that, for example, TL1.2m of gold was required to free up TL1m of Turkish Lira (TL) reserves. For the next 5% bracket, the ratio rose to 1.7, and for the last 5% the ratio stands at 2.2. The value of the gold is marked-to-market every 15 days.
A new incentive announced by the CBRT on September 1, 2016 defined a further tranche of 5%, in addition to the existing 30% facility. This 5% also featured two new elements. First, it allowed only bullion refined from scrap gold collected by banks from the public after October 3, 2016 to be utilised, and excluded all other bullion from other sources.
Second, the reserve option ratio will be set to 1, which means there is a one-to-one conversion towards the ROC. The lower ROC suggests that banks will now be incentivised to attract consumer-held gold stocks since other forms of gold, such as metal acquired via electronic purchases, will not qualify.
This ruling was then amended on 18th January 2020, with the 30% ceiling reduced to 20%. On 24th February 2021, this was again reduced, this time to 15% and the scrap gold related tranche, which was first introduced as 5% and raised to 10% on 16th February 2019, has been further increased to 15%. Under this scheme, commercial banks have been allowed to use gold against a portion of their reserve liabilities. In turn, this encouraged banks to start gold collection days where they bought back gold from the public. Beforehand, gold deposit accounts did not pay interest, but it then became more common to do so, with interest rates peaking at around 2.4% by mid-2018. However, this trend then reversed. Today, interest can range from as low as 0.15% up to 1%, with some commercial banks offering interest-free gold bank accounts. This change reflects the increased reserve requirement ratios, which by 19th November 2020, stood at 18% for maturities of at least one-year and at 22% for lower maturity dates, depending on the bank in question. Furthermore, investor returns are subject to a 15% withholding tax for account holders over a minimum term starting from three to six months.
4. Gold Swaps
In May 2019, the CBRT started to use gold swaps as another tool to regulate money supply and manage foreign exchange reserves. Under this new policy, commercial banks can swap a portion of their gold holdings with the CBRT in return for lira and foreign currency or vice versa. Gold swapped under this route will be transferred to the CBRT’s account. To put this new policy into perspective, from 12.3t in May 2019, the total amount of gold swap jumped to 123.5t by end-2020.