Zooming in on just the recent action shows that weekly holdings reported by the Central Bank of Turkey fell by a whopping 20% since June 15 to 15.5 million ounces according to Bloomberg, with the bulk of the exodus, or $3.3 billion, sparked by the central bank’s decision last month to lower reserve requirements.

As a reminder, in order to stem the plunge in the lira, on August 13 the Turkish central bank cut reserve requirements for banks by 4% points for foreign exchange liabilities over one, two and three years, and by 2.5% points over other maturities. This, the central bank said, equated to $3 billion worth of dollar-equivalent gold liquidity.

But why would banks proceed to liquidate their gold holdings as reserves were released?

For one reason: unlike most countries, in Turkey commercial banks are allowed to meet reserve requirements with gold bullion deposits, which also explains why Turkey was the hub smuggling some 200 tons of gold to Iran (a money-laundering scheme that also included the scandal-plagued smuggling some 200 tons of gold ) in exchange for various products during the 2013 Iran sanctions.

Furthermore, Turkish banks mostly borrow on international markets in dollars and other hard currencies, while hedging dollar liabilities using gold deposits instead of the volatile lira, even as their loans are denominated in lira, making gold the fulcrum security in bank balance sheets.

Like in India, gold is especially revered in Turkey which is one of the 20 largest sovereign owners of the precious metal and boasts the fifth-biggest consumer demand in the world, according to 2017 data from the World Gold Council. It refines scrap gold into jewelry sold all over the Middle East, and – when the Iran sanctions hit in earnest in November – Turkish gold will once again serve as a monetary lifeline to Tehran, as the untracable gold-petro-yuandollar loop is restored.

Commenting on the sharp plunge in gold reserves, Capital Economics’ Jason Tuvey said that “the commercial banks were probably switching to more liquid assets, given what has happened to the lira.” Confirming what we said above, Tuvey also noted that “there’s been concern at the commercial banks over their external debt burden, which has been reflected in the rising bank bond yields.”