The Turkish central bank is massively expanding its gold purchases. According to data published on Monday by the World Gold Council (WGC), central bankers stored around 41 tonnes of gold in government vaults in August. This was the highest figure for Turkey in the WGC’s monthly statistics dating back to January 2002.
Turkey accounted for three-quarters of the global central banks’ total demand for gold. In August they bought a total of around 61 tonnes of the precious metal. The central banks of Russia and China also recently continued their gold purchases, albeit to a lesser extent than in previous months: Russia bought 11.3 tonnes of gold, China 5.9 tonnes. Krishan Gopaul, WGC analyst, says: “Global uncertainty remains at a high level and it doesn’t look like this will change. Against this backdrop, central banks are continuing to increase the share of gold in their currency reserves.”
The Russian central bankers in particular have once again shown great skill in timing their gold purchases: Between July 2018 and June 2019 they filled their gold reserves with around 262 tonnes. At the end of June, the gold price rallied and climbed by twelve percent within a few weeks. Since then, Russian gold purchases have declined somewhat. China also intensified its gold purchases, particularly in the first half of 2019, and bought less in August in view of rising prices.
What unites China, Russia and Turkey
Turkey is different: at the end of August the gold price in lira marked a new all-time high. At that time one ounce of gold (about 31 grams) cost about 9000 Turkish lira. The Turkish central bankers bought gold at precisely the time when it was most expensive for the Turkish state. However, the central banks of Russia, China and Turkey are united by the strategy behind gold buying: The countries are thus trying to reduce the dependence of their currencies on the dollar.
The trade conflict and threats of sanctions, such as those that the USA has issued against Russia and Turkey in the past, would thus have less impact on the price of the national currencies. Turkey’s economy in particular is vulnerable to a drop in the price of the lira because the country is heavily dependent on oil imports. Since oil is traded in dollars, a weak lira further fuels the already high inflation in the country.
However, investors can assume that central bank demand for gold will remain high. This should also have a stabilizing effect on the gold price. Last year, the central banks bought around 15 percent of global gold production. The share is likely to be similarly high this year as well: Since the beginning of the year, countries have bought more than 450 tonnes, or more than ten percent of the world’s annual production.
The precious metal also disappears into the vaults of the central banks and is withdrawn from the market indefinitely. According to the WGC, a wave of sales by the central banks, which in the past has repeatedly triggered gold price weakness, is not foreseeable. Since the financial crisis in 2008, global central banks have been buying more gold than they are selling.