Why is gold continuously falling? Amid the US-Iran conflict, this "super central bank supporter" has sold off over 58 tons in just two weeks!

According to the latest data released by the Central Bank of Turkey, Turkey’s gold reserves decreased by 6 tons in the week of March 13 and then by 52.4 tons in the week of March 20, resulting in a significant decline in reserves. Sources reveal that some of the gold was sold directly, while most was used in swap agreements to exchange for foreign currency or lira liquidity.

Iris Cibre, founder of Phoenix Consultancy based in Istanbul, stated that to meet liquidity needs and stabilize domestic demand, Turkish officials have tapped into the central bank’s gold reserves to raise funds through sales and gold swap arrangements. She estimates that of the total 58.4 tons of gold sold, more than half was achieved through gold exchange transactions conducted overseas.

Turkey’s move comes at a time when its “de-inflation” strategy is under pressure. This strategy heavily relies on maintaining the stability or continued depreciation of the lira, usually achieved through foreign exchange interventions by state-owned banks. However, since the outbreak of the US-Iran conflict, rising energy import costs and increased demand for the dollar have made it more difficult to sustain this strategy.

Media estimates suggest that the aforementioned sell-off exceeds the total outflow from gold ETFs during the same period, which is about 43 tons. ETFs are one of the most popular ways for institutional and retail investors to invest in gold.

“Big Buyers” Turning to Crush Gold

In fact, analysts have been speculating that due to the impact of the war between the US and Israel with Iran on the global economy and financial markets, central banks around the world are being forced to monetize gold reserves to obtain emergency liquidity, which may have intensified the recent selling pressure on gold, leading to a temporary drop in gold prices into bear market territory.

With the disclosure of the Turkish central bank’s actions, this speculation is gradually being confirmed. It is worth noting that over the past decade, Turkey has been one of the most active gold buyers globally, with its leadership long committed to reducing dependence on dollar-denominated assets. According to data from the World Gold Council, as of the end of January, the Turkish central bank held 603 tons of gold, valued at $135 billion.

This move represents a significant shift for “big buyers” and coincides with a sharp decline in gold prices during the US-Iran conflict. Gold prices have fallen about 15% this month, as investors took profits after a strong rally since last year.

Daniel Ghali, a commodity strategist at TD Securities, stated that the economic shocks from the US-Iran war may weaken some central banks’ demand for gold while forcing others to sell gold reserves to meet dollar-denominated obligations.

“Direct sales are not impossible, although we expect the overall trend of central banks accumulating gold to slow significantly for now, which will be a major trend,” he added.

It is also noteworthy that Turkey may be the first country to monetize gold in the current turbulent economic environment, but it may not be the only one. The National Bank of Poland has been the largest gold buyer among global central banks over the past two years, and it has indicated a willingness to monetize gold to support national military construction.

At the beginning of March, Adam Glapinski, the president of the National Bank of Poland, proposed a plan to raise up to $13 billion by selling the country’s gold reserves to double its defense budget.

Rob Haworth, a senior investment strategist at Bank of America Wealth Management, stated in a recent interview that there is a risk that central banks will monetize gold to meet urgent liquidity needs.

He also noted that at least in the current environment, central banks are unlikely to buy gold, as they are focused on trying to curb rising inflation.

“It’s not that central banks are price-sensitive. They are not hedge funds that price gold reserves at market value. But right now, due to societal demands, they need to invest in other more important and scarce assets,” he added.

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(Source: Caijing Lianhe)