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

Caixin March 27 News (Editor: Huang Junzhi) According to the latest data released by the Central Bank of Turkey, Turkey’s gold reserves decreased by 6 tons in the week ending March 13, and another 52.4 tons in the week ending March 20, significantly reducing reserves. Sources familiar with the matter revealed that some gold was sold directly, while most was exchanged through swap agreements to obtain foreign exchange or lira liquidity.

Iris Cibre, founder of Phoenix Consultancy based in Istanbul, said that to meet liquidity needs and stabilize domestic demand, Turkish officials have mobilized the central bank’s gold reserves by selling and using gold swaps to raise funds. She estimates that over half of the total 58.4 tons of gold sold was achieved through gold exchange transactions overseas.

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

Media estimates suggest that the above sales exceeded the total outflows from gold ETFs during the same period, which were about 43 tons. ETFs are one of the most popular ways for institutional and retail investors to invest in gold.

Major Buyers Turn Against Gold

In fact, analysts have been speculating that, due to the impact of the US and Israel’s conflicts with Iran on the global economy and financial markets, central banks around the world have been forced to monetize their gold reserves to obtain emergency liquidity. This may have intensified recent gold selling pressures, with gold prices once entering a bear market territory.

With the disclosure of Turkey’s central bank measures, this speculation is gradually being confirmed. It’s 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 assets. According to the World Gold Council, as of the end of January, the Turkish central bank held 603 tons of gold, worth about $135 billion.

This move marks a significant shift by a “major buyer,” coinciding with a sharp decline in gold prices amid the US-Iran conflict. Gold prices have fallen about 15% this month, after a strong rally since last year, as investors take profits.

TD Securities commodity strategist Daniel Ghali said that the economic shocks from the US-Iran war could 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 increasing gold holdings to slow significantly for now—that 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 an isolated case. The Polish National Bank has been the largest gold buyer among central banks worldwide over the past two years, and has expressed willingness to monetize gold to support national military development.

In early March, Polish central bank governor Adam Glapinski proposed a plan to raise up to $13 billion by selling the country’s gold reserves to double its defense budget.

Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said in a recent interview that there is a risk of central banks monetizing gold to meet urgent liquidity needs.

He also stated that, at least in the current environment, it is unlikely that central banks will buy gold, as they are focused on curbing rising inflation.

“Central banks are not price-sensitive. They are not hedge funds and do not value gold reserves at market prices. But currently, due to societal demand, they need to invest in other, more important and scarce assets,” he added.