TOKYO -- Turkey has overtaken Russia as the world's largest purchaser of gold amid concerns that it could be barred from dollar settlements over cooling ties with the U.S.
Central banks around the world have been building up reserves of the precious metal in the last decade to diversify their portfolios. Russia had been a major contributor to the trend and is now the world's fifth-largest gold-owning country, holding nearly 2,300 tons, according to the latest World Gold Council figures.
But Russia's gold purchases for the January-May period plunged roughly 60% on the year to around 28 tons. The country's central bank said in late March that it would halt domestic gold purchases, starting April 1, without explaining why.
"Looking from the outside, it's highly likely that the plunge in crude oil prices impacted Russia's stance on gold purchases," said Takahiro Morita of financial research firm Morita & Associates. If Russia is generating less from oil exports, the country has less money for gold.
Instead, Turkey's central bank has emerged the world's largest buyer of gold for reserves. It purchased about 148 tons in the January-May period -- roughly triple the year-earlier figure.
Like Russia, Turkey has recently seen its foreign-currency income dwindle. Tourist spending, a key driver of its economy, has fallen in light of the coronavirus outbreak, and the lira has traded at the weakest levels on record lately.
"There is little economic rationale for Turkey to stretch itself thin to buy gold right now," said Kota Hirayama of SMBC Nikko Securities. The country would have an easier time defending its currency against further depreciation if it simply held on to its foreign-currency reserves.
Yet Turkey is acquiring gold anyway, presumably because relations with the U.S. have soured in recent years. The Trump administration imposed sanctions on Turkey in 2018 over the detention of an American pastor by Turkish authorities.
Turkey procured a surface-to-air missile system from Russia 2019, putting fellow NATO members in an awkward spot.
Turkish President Recep Tayyip Erdogan's government has demanded the extradition of a U.S.-based Muslim cleric accused of involvement in the attempted coup against Erdogan in 2016. Washington has so far refused, creating another bilateral flashpoint.
Should relations worsen further and the U.S. toughen sanctions, Turkey risks not being able to procure U.S. dollars for payment settlements. Just last week, U.S. President Donald Trump signed a bill that blocks banks in China from procuring dollars, in response to the national security law it imposed on Hong Kong.
There is one warning sign that Turkey could very well share the same fate as China. In March, back when the global pandemic rocked global financial markets, the U.S. Federal Reserve opened up liquidity swap lines to a host of central banks facing dollar shortages.
Turkey was conspicuous in its absence from the expanded roster of recipients.
"It's possible that it fueled the Turks' anxiety that it cannot rely on the U.S. in an emergency," Hirayama said.
The shift away from the dollar threatens to spill over to central banks elsewhere in the world, particularly in developing economies. Developing-nation central banks had strongly trended toward holding U.S. Treasurys in foreign-currency reserves, thanks to the debt's high liquidity.
With Treasury yields now close to zero, "managing other assets will likely generate higher rates of return, and there is a potential of a growing opportunity cost of holding U.S. debt," said Daisuke Karakama, chief market economist at Mizuho Bank.
Gold does not have an interest rate, making it a tempting alternative to the dollar. Russia's suspension will likely shrink overall purchases of the metal by central banks for the short term. A longer view points to another surge in traffic toward gold.