Gold Price Crash Driven by Central Banks Monetising Holdings for Emergency Liquidity Amid Middle East War

Gold has been rallying hard since last year, until just before the Middle East conflict, which triggered a massive price correction, wiping out nearly all recent gains. Many who purchased gold when prices peaked are trading in the red, leaving investors worrying if prices will correct further in the coming days.

Investors like gold for its universal demand, scarcity, and exchangeability. Gold prices typically rise during market downturns, and investors have been using it as a safe-haven asset to hedge against losses. However, the current gold price correction may be a deviation from its usual trend and could be short-lived.

Financial experts believe the gold's selling pressure could have been primarily driven by central banks monetising their gold reserves for emergency liquidity amid the US-Iran war, rather than by investors engaged in panic-selling amid declining prices.

This speculation is proving true: Bloomberg reported that Turkey's central bank is again tapping its gold reserves, which have declined by around 59 tonnes over the last two weeks.

Experts believe some of the gold was sold outright, while most was used to secure liras through swap agreements. These agreements enable central banks to exchange gold for currency, with an agreement to trade back the currency for gold in the future.

According to World Gold Council data as of January-end, Turkey's central bank held 603 tonnes of gold. Turkey has been an aggressive buyer of gold, but it has monetised its reserves multiple times in recent years.

In 2023, Turkey sold 159 tonnes of gold between March and May amid unexpectedly higher inflation, as domestic demand for gold widened the government's current account deficit. In a bid to reduce the deficit, the central bank sold its gold to citizens but began recovering it soon after inflation cooled.

More Central Banks to Follow Turkey?

While Turkey might be the first country to tap into its gold reserves amid the current Middle East crisis, the National Bank of Poland has indicated it could monetise its gold as well to support the country's military buildup. The National Bank of Poland has been the top buyer of gold for the last two years.

Earlier this month, Adam Glapinski, governor of Poland's central bank, proposed raising up to $13 billion by selling the country's gold reserves to finance its rising defence budget.

Rob Haworth, senior investment strategist at US Bank Wealth Management, said in a recent interview that there is a near-term risk that central banks will monetise their gold to meet emergency liquidity needs.

'It's not that central banks are price sensitive. They're not a hedge fund that marks their gold reserves to market. But right now, because of society's needs, they have a call for other assets that are more important and scarcer at this time,' he explained.

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