Eurasia Review

Turkey’s Gold Conversion Plan Likely To Falter On Lack Of Public Trust
– Analysis
By James M. Dorsey
Feb. 13, 2022


When Turkish finance minister Nureddin Nebati this week announced
plans to encourage households to convert their gold holdings into
Turkish liras in a bid to shore up Turkish central bank reserves, he
was targeting people like Esra G.

Ms. G., whose last name has been abbreviated to preserve her
anonymity, has had a life-long troubled relationship with gold. When
she was barely three years old, her distaste for it as an adornment
was already so strong that she dumped all her gold rings, bracelets,
necklaces, and earrings into the Bosporus.

Nonetheless, Ms. G. grew up to be an avid collector of gold, including
an assortment of five- and 10-gram Credit Suisse coins. As a young
woman, Ms. G. preferred antique silver jewelry and wouldn’t wear gold
but kept her gold collection under her pillow.

“Gold is a tradition. It grows out of a deep-seated distrust of
governments and currencies and has been handed down from generation to
generation. They didn’t take money. They took gold,” she said. “I’m a
child of that system. … I want the gold where I can touch it and feel
it.”

It is the many people like Ms. G. that Mr. Nebati is targeting. The
minister told investors in London this week that he hoped his scheme
would convert 10 percent of the estimated US$250-300 billion worth of
gold squirreled away in the homes and back yards of Turkey, much of it
by women.

Ayse Esen, head of a leading Turkish gold refinery, shared Mr.
Nebati’s estimate. “We are aware of the fact that there is around
3,000-5,000 tonnes of gold saved under mattresses, which amounts to an
informal economy with a size of $200-300 billion,” Ms. Esen, CEO of
Istanbul Gold Refinery (IAR), said.

According to the World Gold Council, official Turkish gold reserves
dropped from a high of 583 tonnes in July 2020 to 392 tonnes a year
later.

Speaking to Sabah, a pro-government daily, Ms. Esen, probably
unwittingly, suggested that convincing Turks to convert their gold
could prove to be an uphill battle. She noted that a program launched
ten years ago by the refinery and commercial banks had so far netted a
mere 100 tonnes of hidden gold.

Lack of confidence in the government is only part of the problem. As
important is the fact that much of Turkey’s gold hoard is
non-negotiable because it is held in the form of jewelry. Turkey’s
40,000 jewelers turn approximately 150 tonnes of gold into jewelry a
year.

Mr. Nebati reportedly told investors that some 30,000 gold shops would
purchase privately held jewelry as part of his scheme and sell it to
one of five government-contracted refineries that are believed to
include IAR. The refineries would convert the jewelry into bullion
that could be added to the central bank’s reserves.

It’s not clear why Mr. Nebati believes his scheme would work this time
around when earlier attempts failed. One such effort involved creating
a facility that allowed holders of gold to deposit it with banks in
exchange for gold certificates that would have been negotiable on a
gold exchange.

Ms. G., the woman who doesn’t like gold jewelry, vowed already decades
ago that she would never trust a bank with her gold, even though she
doesn’t hesitate to deposit money in a bank.

She, like many Turks, is historically suspicious of authority, and
many of them see hoarding gold not only as a safe investment but also
as a reserve that can’t be taken away from them. It also doesn’t
violate the Islamic ban on interest.

In the early 19th century, Turks hoarded gold to evade Ottoman taxes,
which were based on what taxpayers physically possessed when the tax
collector came around. As a result, Ottoman subjects bought gold and
buried it not to be counted and taxed. Despite the Ottomans’ later
introduction of paper money, Ottoman subjects continued to view gold
as their most secure form of investment because of inflation.

“People did not trust it,” said a gold trader. “The certificate had no
relationship to the gold. It was devalued by inflation, and people
have distrusted paper money ever since. . . . Gold has become a symbol
of distrust of the state.”

“I’ve been in this business for decades and have seen a lot of change.
One thing never changes, and that is gold. Our money is worthless;
gold is much better. Besides that, gold is part of our history,” added
a jewelry repair shop owner.

Trust as much as tradition may prove to be Mr. Nebati’s Achilles heel.

By attracting hidden gold, Mr. Nebati aims to help the government stop
the freefall of the Turkish lira, which lost more than 40 percent of
its value last year and halt the spiralling out of control of
inflation that last month hit 36.1 per cent.

Many blame the crisis on President Recep Tayyip Erdogan’s
idiosyncratic push to cut interest rates based on his unorthodox
belief that this would lower consumer prices.

As a result, a whopping 75 per cent of respondents in a survey in
December by Metropoll, a Turkish polling company Metropoll, said their
trust in the government’s economic policies had decreased. More than
half of those polled said they disapproved of Mr. Erdogan’s
performance.

Mr. Erdogan has undermined the independence of the Central Bank, fired
three of its governors and other officials opposed to his interest
cuts in the last two years, changed finance ministers four times since
2018, and spun conspiracy theories by blaming a mysterious foreign
interest cabal for Turkey’s economic plight.

Public distrust recently manifested itself further in a wave of
protests over massive electricity price hikes as millions struggle to
pay ballooning bills and inflation threatens to force businesses into
bankruptcy.

Mr. Erdogan has recently suggested that he would halt or slow down the
lowering of interest rates as a series of emergency measures helped
the lira recover some of its value against the dollar.

The measures pushed Mr. Erdogan’s approval rating up by two points to
40.7 per cent in January, still far behind the 54.4 per cent who
evaluate the president’s performance negatively.

Polls show that Mr. Erdogan would lose to Ankara Mayor Mansur Yavas
and Istanbul Mayor Ekrem Imamoglu – both from the main opposition
Republican People’s Party (CHP) and Iyi (Good) Party Chairwoman Meral
Aksener, at the next elections.

Mr. Erdogan’s numbers hardly project the degree of confidence that Mr.
Nebati is likely to need to persuade his intrinsically skeptical
compatriots from parting with their precious gold.

Said a former Istanbul banker: “People are unlikely to put their
holdings at risk for a scheme that does not guarantee their ability to
preserve whatever wealth they have. Certainly not at a time of
economic turmoil and a widening gap in trust.”

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James M. Dorsey is a senior fellow at Nanyang Technological
University's S. Rajaratnam School of International Studies in
Singapore and the author of the blog, The Turbulent World of Middle
East Soccer.