Turkey is going through an economic crisis―the lira has dropped to an all-time low, 34% over the week ending August 10. The euro also fell 2% over the week because some of the eurozone’s largest banks are lenders to Turkey, as highlighted by the European Central Bank’s financial watchdog department.

Gold traditionally has been seen as a safe-haven asset, often sought in times of investor anxiety. However, gold prices have declined .4% in the past week.1

Why Hasn’t Gold Reacted More Strongly?

Well, gold doesn’t always react quickly in times of stress. During the Argentine crisis, for example, the Minister of the Economy froze bank accounts on December 1, 2001 (a clear sign the writing was on the wall), and on December 23, 2001, the government defaulted on its sovereign debt. In the month of December 2001, gold rose only 1%. But in the first half of 2002, gold rose 15% as the ramifications of the Argentine crisis (and dot-com bubble issues) introduced a clear geopolitical premium into gold. This indicates that even as a crisis unfolds, it is not too late to build a hedge.

Turkish Central Bank: Largest Gold Accumulator in 2017

Gold’s relative underwhelming reaction to Turkey’s issues today may also be due to some of Turkey’s unique features.

The Central Bank of the Republic of Turkey (CBRT) is a large purchaser of gold. When defending the lira in this crisis, it may sell gold and investors may perceive this supply as price-negative. The CBRT bought 85.9 metric tons of gold in 2017, the second-largest gold purchases of any central bank next to the Central Bank of the Russian Federation (223.5 metric tons) in 2017. 

Turkey has a somewhat unusual system in which commercial banks can use gold to meet reserve requirements with the central bank. In 2017, gold inflows into CBRT from commercial banks (held on reserve) amounted to 187.7 metric tons. Combining these two sources of flows to the CBRT, gold inflows into Turkey were the highest of any central bank.