Turkey, ‘Axis of Gold’ and the End of US Dollar Hegemony

 

Introduction

With a ‘Hard Brexit’ looking more likely and Trump’s inauguration this week, 2017 is well and truly under way.

What we expect the year to hold is probably not even half of what it really will. But from what we know, the upcoming French and German elections, referendums, geopolitical crises, steps towards reverse globalisation and a third of global government debt yielding negative interest rates, governments are already prompting central banks and investors to turn to the one asset that has survived millennia of financial and monetary crises.

One that is highly liquid and convertible into other currencies – gold.

Whilst mining output remains relatively flat and we are at peak gold, Western central banks have stopped gold sales, large emerging market economies continue to increase their gold reserves. China, Russia (both top gold purchasers in 2016) and now Turkey, are the notable players.

Turkey’s President Recep Tayyip Erdogan reminded us of this when he called on his citizens to buy gold:

“Those who keep dollar or Euro currency under their mattresses should come and turn them into Liras or gold.”

This has been met by such support that, not only did Turkish gold imports surge 688% in December, to reach their highest monthly level in two years but, according to Reuters, “fervent supporters have offered free haircuts, fish and even tombstones to those who can prove they have done so.”

As a result, in December 2016 imports reached 36.7 tonnes, significantly more than the 4.65 tonnes seen in the same month in 2015. This accounted for more than one-third of the country’s annual imports of 106.2 tonnes, more than double 48.7 tonnes in 2015.

Before 1993, the Turkish gold market was not fully liberalised, since then the World Gold Council reports that they have seen ‘rapid growth of the sector’ and this is across all areas relevant to the physical gold market.

Encouragement to buy gold from the likes of Prime Minister Erdogan, who is very popular with huge swathes of the electorate, is not just a selfless act to protect citizens’ wealth during uncertain times in Turkey, the Middle East and across the globe. There are several factors at play here.

These factors should be considered with Turkey’s unique role in the global gold market, in mind. There is no country positioned in such a way (both geographically and politically) that plays all three major roles of producer, buyer and conduit, in the world of gold.

‘Tough Turkey’ today

Since 1950 the country has experienced at least one economic crisis per decade and today it is no secret that Turkey is struggling under both economic and political pressures. Along with heightened security concerns that have damaged the much relied-upon tourism sector, economic growth is sluggish, inflation is rising and a strong US dollar is not helping matters.

Despite this, Erdogan has recently tried to prevent the central bank from increasing interest rates.

Gold to save the day?

Central bank gold demand

The title of this section is misleading. Usually when we talk about central bank gold demand we are referring to how much the central bank has purchased for its own reserves. However, when it comes to Turkish central bank demand they don’t so much need to purchase gold, they just amend policy in order to accumulate others’ holdings and therefore demand more of the yellow metal.

According to WGC data, Turkey has the 14th largest amount of central bank gold reserves with 396.5 tonnes. However, this means little given a proportion of this includes gold holdings by commercial banks. At the bottom of the World Gold Council’s official central bank holding’s list they place a foot note on Turkey, that reads “Gold has been added to Turkey’s balance sheet as a result of a policy accepting gold in its reserve requirements from commercial banks.”

This is because in 2012 the Turkish central bank increased the amount of gold commercial banks could hold as reserves to meet their reserve liability requirements, to 20%. Any form of gold was accepted as collateral. The government were looking to mobilise ‘under the pillow gold’. Banks were also told that gold reserves could not count towards foreign currency liabilities.

Personal accumulation

Since the liberalisation of the Turkish gold market, local banks have offered gold accounts for its citizens, however as of 2012 much of the privately held gold was outside of the banking system. Estimates vary as to how much is privately held, ranging from 3,500t to 5,000t.

The government has, since 2011 tried a number of routes and incentives to encourage citizens to get their gold into the banking system, this is part of the drive to reduce the risk of a liquidity crisis.

Country’s gold reserves

Arguably the country doesn’t need to go on a huge gold grab from its citizens. Turkey is Europe’s largest gold producer. Every year since 2001 gold production has climbed, from 2t in 2001 to 33.5t in 2013.

According to the World Gold Council, the Turkey’s Ministry of Energy & Natural Resources estimate gold reserves to be 840t, and resources to be as high as 6,500t. The government continues to encourage growth in the gold mining sector with well-considered incentive schemes to get mining companies up and running.

Gold recycling is also well-established in the country and there is strong supply-chain. With this and it’s growing mining sector it isn’t surprising that is one of a handful of countries that has more than one LBMA accredited refinery, an excellent position to be in as the gateway between Europe, Asia and the Middle East.

Conduit to Iran

‘…It is this recent surge in trade with Iran which analysts believe accounts for the tripling in demand by Iran for Turkey’s precious metals, mainly gold. The longer the Islamic Republic remains isolated, the greater the trade in Turkish gold, and the longer high prices in the local market are maintained. Reuters report that the fall in the rial’s value against the dollar has caused an increase gold investment for savings purposes.”

This trade apparently continues today, explains Jim Rickards:

“Reliable data is not available for Iran, however, exports from Turkey and Dubai to Iran are significant, and there is good reason to conclude that Iran is also a rising gold power relative to the size of its economy.”

Axis of Gold

And where does all this lead to? The ‘Axis of Gold’, as entitled by Rickards. Once again, it is very important to consider Turkey’s geographical position and allies when it comes to gold demand.

“A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems…Russia, China, Turkey, and Iran constitute a new “Axis of Gold” prepared to undermine confidence in the U.S. dollar.”

This has been confirmed by Erdogan himself, as reported by Hurriyet, in early December last year.  As the Turkish President Erodgan opened a new mall he took the opportunity to say a few words about the country’s foreign exchange ideas ‘“I proposed Putin the following: Let’s do our trade in local currencies. Whatever I buy [from you] I shall pay you in Russian ruble, and whatever you buy from me make the payment in Turkish Liras,” said Erdogan on December 3… 

The move to accumulate gold in Russia is no secret, and as Putin advisor, Sergey Glazyev told Russian Insider, in April 2016,  ‘The ruble is the most gold-backed currency in the world’.

The Hurriyet report continues:

He added that he had made the same offer to China and Iran and his offer was found reasonable.  “We have given the necessary instructions to our central banks and we will try to conduct such [trade] relationships between us through this way,” Erdogan said.

Erdogan again reiterated his call to Turkish citizens to convert their foreign exchange into gold or the Turkish Lira. “Those who keep foreign currency under their mattress should come and turn them into lira or gold,” he said.’

Conclusion: Gold as an insurance policy

Turkey may well have major issues in many areas of its economy, but it is positioning itself for the changing of the monetary guard that we are slowly witnessing around the world, and it is using gold as its insurance and safe haven in the ongoing and soon to escalate currency wars.

Russia and China are poised for a weakening of the dollar and of the influence of the last superpower and indeed the potential political and financial contagion in the EU.

In an increasingly multi polar world where the heavily indebted, near bankrupt U.S. economy and by extension the U.S. dollar look very vulnerable, gold is the ideal currency for those seeking to protect themselves from the coming decline of the dollar.

This applies for all – for apolitical investors, for U.S. allies and especially as we have seen for the U.S.’ competitors and adversaries who are looking to operate beyond the realms of the US-dollar denominated SWIFT payments and dollar based monetary system.

Gold is highly liquid, cannot fall victim to cyber warfare and is very difficult  to steal or confiscate if owned in the safest ways – allocated and segregated gold coins and bars in the safest jurisdictions in the world. It has throughout history and in recent months shown its safe haven attributes and value as a hedge against dollar and other fiat currencies weakness and devaluation.

Full article: Turkey, ‘Axis of Gold’ and the End of US Dollar Hegemony (GoldCore)

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