Turkey’s Attempt to Mop up Mattress Gold (Lessons for India?)

JP Koning has a nice post reviewing few measures taken by Turkish Govt/Central bank to monetise gold:

This measure which allows commercial banks to park gold to get central bank reserves is interesting:

The nation’s central bank, the Central Bank of the Republic of Turkey (CBRT), has become particularly active in the campaign to draw gold into the banking system. It does so by allowing central banks to keep some portion of their required reserves in the form of gold. Let’s unpack the idea of reserve requirements a bit more. Central banks often (though not always) require deposit-taking commercial banks to permanently freeze a fixed amount of reserves at the central bank. (Canada for instance has no reserve requirements). A central bank that imposes reserve requirements typically remunerates reserves at a below-market rate, sometimes 0%. Required reserves therefore function as a tax on the banking system. If banks weren’t required to keep funds in their central bank accounts, they would be investing the funds elsewhere at a higher rate.

Turkish banks were cut some slack in 2011 when the CBRT implemented a special program called the Reserve Option Mechanism, or ROM. Instead of requiring that banks meet their entire reserve requirement by holding poorly-compensated Turkish lira funds at the CBRT, the Reserve Option Mechanism allowed them to satisfy up to 30% of their requirements by depositing gold at the central bank. This offer was quickly taken up by Turkish banks, who began to deposit gold up to the maximum allowed amount. The chart below  illustrates the popularity of the ROM. The 30% tranche, which was introduced in stages starting with a 10% tranche in 2011 and subsequently boosted to 20% and then 25% in 2012, has almost always been used to its full capacity.

Given Turkish banks’ eagerness to deposit gold, it is fair to say that the Reserve Option Mechanism offered banks a cheaper alternative for meeting reserve requirements than the traditional avenue of borrowing Turkish lira funds and keeping them on deposit at the CBRT. Put differently, the gold option has provided bankers with a route for reducing the size of the tax imposed on the banking sector by reserve requirements.

Then we have gold deposits for retail investors. They can park their gold with the bank and get interest on their deposits.

Having said that, none of the options are successful:

Turkey’s campaign to mop up mattress gold hasn’t been very successful. Neither the original 2011 Reserve Option Mechanism nor its 2016 extension to scrap metal have attracted large amounts of physical gold from the public. The recent attempts at pushing gold bonds and lease certificates on the public have also fallen flat.

Presumably the Turkish government will have to increase its efforts if it wants to put a real dent in the 3,500 tonnes of mattress gold presumed to be held by Turks. This may require a much larger ROM gold tranche or higher interest rates on gold bonds. As it is, the 2.4% paid on gold bonds simply hasn’t enticed the public into giving up their gold. But using more resources to attract gold out from mattresses will only come at the expense of Turkish taxpayers. Is it worth it? If the effort to mop up Turkey’s mattress gold does expand, at some point the presumed benefits of capturing mattress gold will be overwhelmed by the costs of overcoming people’s fondness for the yellow metal.

Even the unstable political climate in the country could be a reason for people to hoard gold. I mean at the end of the day human psyche remains the same when it comes to investing. Gold continues to be a major asset class in most countries and even more in countries with unstable political and economic climate….

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