Mobilizing gold reserves! The battle to defend the Turkish lira escalates, plans to launch gold-for-foreign exchange to counter the impact of war

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The U.S.-Iran war shocks Turkish exchange rate stability, the central bank expands its intervention toolbox, and gold reserves may become the last line of defense.

On Tuesday, Bloomberg cited sources revealing that the Turkish central bank is preparing a broader set of tools to deal with exchange rate fluctuations caused by the Iran conflict, including the use of its massive gold reserves. The Turkish central bank has held internal discussions about conducting gold-for-foreign exchange swap transactions on the London market and may use gold stored at the Bank of England for foreign exchange intervention.

Since the outbreak of the Iran conflict, international oil prices have soared from around $70/barrel to over $100/barrel. Turkey is almost entirely dependent on imported oil and natural gas, facing severe inflationary shocks and balance of payment pressure. Currently, the country's inflation rate is as high as 31.5%, ranking among the highest in the world, and the government is struggling to maintain an anti-inflation strategy centered on the real appreciation of the lira.

As of publication, the Turkish lira fell 0.1% against the U.S. dollar. Since the start of the year, the lira's average daily depreciation has been about 0.05%, with the decline continuous and stable.

First sell U.S. Treasuries, then raise interest rates, finally move gold?

Over the past decade, Turkey has been one of the world’s most active gold buyers, with its leadership long committed to reducing reliance on dollar assets. As of early March, the Turkish central bank’s gold reserves were worth about $135 billion.

JP Morgan economist Fatih Akcelik pointed out in a report Tuesday that Turkey is estimated to have about $30 billion worth of gold stored at the Bank of England, which “does not face logistical constraints and can be directly decided by the central bank for foreign exchange intervention.” This makes the gold stored in London Turkey’s most operationally accessible emergency reserve asset.

Before resorting to gold reserves, Turkish policymakers have already used multiple measures in response. Authorities tightened liquidity to raise lira financing costs and instructed state-owned banks to intervene in the exchange rate market.

At the same time, the Turkish central bank has been selling its holdings of foreign government bonds, including U.S. Treasuries. According to sources, related sales amounted to about $16 billion over the past few weeks. As of the end of January, Turkey’s holdings of U.S. Treasuries had dropped below $17 billion, far lower than the 2015 peak of $82 billion.

On the interest rate front, Turkey’s benchmark rate remains at 37%, but in early March the central bank suspended funding via that rate window, switching to higher-cost financing channels with a rate of 40%. Market rate expectations have also fluctuated sharply, and traders have priced in a 100 basis point rate hike next month.

Foreign capital withdrawal, private dollar demand rises

Signs of pressure have emerged on multiple fronts. According to data released by the Turkish central bank on Monday, as of the week ending March 13, foreign investors sold Turkish government bonds at the fastest pace on record.

Tensions are also appearing at the street level. This week, Istanbul Grand Bazaar money exchangers sold dollars at prices higher than interbank exchange rates, reflecting a significant rise in local residents’ demand for hard currency.

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