Turkey Just Sold Its Gold — Here's Why That Should Scare You

[00:00:00]Turkey is selling its gold. That's not a metaphor. They're selling actual gold, gold bars out of the vault of its central bank. Now, they're not doing this to defend their currency, and they're not doing it to fund a war. They are doing it to buy diesel. And if that sounds like Turkeykey's problem, you need to understand what Turkey sold first. American government debt, US treasuries. And that cascade is what we are going to talk about today. Because if countries are being forced to sell American debt just to keep the lights on and the trucks moving, then Turkey isn't the story. Turkey is the first crack in something a lot bigger. Here is what most investors never think about. When you buy a US Treasury, you think you own the safest asset on Earth. But safe rests on one quiet assumption that when you want your money back, somebody will be there to buy that treasury from you.

[00:00:58]So what happens therefore when all the buyers turn into sellers? To understand why that's suddenly a real question, look at this. The straight of Hormuz 2 years ago, not one analyst on Wall Street had horm closes on their list. It was a black swan. It was the thing that nobody saw coming and then it came. Now 1/5 of all the oil on the planet moves through that straight. So if you shut it, you've choked off 20% of the world's oil overnight. But the number is actually a lot bigger than that. And many people don't realize, but the straight of Hormuz accounts for 40% of the world's export oil, meaning the oil that is available for sale. So if you're a country like Japan that imports all of its oil, they don't care about the whole oil market. They just care about the export market because that's what they live and die on. What America produces and consumes was never available for sale. So, it doesn't matter to them. So, when the supply gets choked like it is today, the price does one thing. It climbs. And you've seen that. But follow the money. Higher oil means oil importing countries suddenly need a lot more dollars to pay for that oil. So, they sell the most liquid dollar asset they own, which are US treasuries, to raise that cash to buy that oil. Now, here's the part that really matters. Let me put you in the chair. You run one of these countries. Your fuel is about to stop. The pumps are running dry and people are beginning to notice your voting base. You need dollars today. So, what do you sell? You sell your US treasuries. That's what everybody does, every country. But every country that sells pushes the price of those treasuries down a little bit more because selling pressure on any asset depreciates the price. And a falling price makes the next country holding that same asset nervous. So they sell too before the price drops even further.

[00:02:56]Selling feeds fear and fear feeds more selling. That's not a market anymore. It quickly becomes a spiral almost like a bank run. Now, who is standing in the middle of that spiral? It's the United States government. It funds itself by selling those same treasuries. So, it needs buyers, not sellers. But although a lot of people talk about how selling in the Treasury market is bad for the United States, and it is, it's actually a lot worse for many other countries at first. So, which countries are those?

[00:03:30]Starting in March, one specific group of countries started selling more treasuries than we've seen in years. Not the rich countries and not the poorest, the middle of the pack. Countries like India, Turkey, Indonesia, Thailand, the Philippines, South Africa, Egypt, Pakistan, Vietnam. Still growing, not rich enough to coast. But here's the key. The middle pack countries that buy almost all of their oil from somebody else. Every one of them has the same two traits and this is important. They import their oil and they keep their national savings parked in US treasuries. So when the oil bill explodes, this is exactly the group that gets squeezed and taps that piggy bank first. The whole story effectively compressed into one country right now is Turkey. Let me show you exactly what selling treasuries to buy oil looks like dollar for dollar. Imagine you are holding a $1,000 treasury. It's safe.

[00:04:30]It's boring, but it's predictable. But then the oil bill lands and it's bigger than you are used to. In fact, it's bigger than your cash flow can afford.

[00:04:40]So, you tap your piggy bank. You sell some treasuries. But because you're not alone in this situation, many other people are selling the same asset. So, the price of that asset in your piggy bank is dropping. So, you don't get $1,000 for your $1,000 bond. you get 950. Now you just ate a $50 loss to buy some diesel, but multiply that by an entire country, not one person. And then multiply it by 10 countries. Every forced sale pushes the price down. And a lower Treasury price means a higher interest rate the United States has to pay to attract new lenders.

[00:05:18]Now, Turkey didn't trim its positions.

[00:05:21]In March alone, it cut its Treasury holdings from $15.7 billion to $1.8 billion, 90% of everything it held in a single month. Now, the stack was never that big to begin with. So, once it was gone, Turkey reached for the other asset in its piggy bank, its gold. And in the first two weeks of the war, its central bank sold or swapped roughly 58 tons, about $8 billion worth of gold. And that was 3 months ago. The bleed hasn't stopped. A country does not start selling its gold to buy diesel unless it has run out of better options. Nobody is further down that road than Turkey. And this isn't a forecast, right? It's a reported in the books already happened fact. Now, here's the detail that matters. This data comes out on a delay.

[00:06:10]That's why it's June and we're talking about March numbers, which means that all of that selling, the treasuries and the gold, that happened while oil was still sitting between 70 and $105 a barrel. Now, hold on to that range because we're going to come back to it in a second. But before we do, if you're wondering what a country running out of dollars actually looks like, you don't have to guess because it happened recently in 2022 in Sri Lanka. Now, Sri Lanka imports almost everything it runs on, its fuel, much of its food, and nearly all of its medicine. And it pays for every bit of that in dollars. The biggest source of those dollars by far was tourism. More than 5% of the entire economy. But then 2020 happened and tourism stopped. So, the country drained its piggy bank to fill the hole. Its piggy bank was US treasuries. Foreign reserves went from $7.6 6 billion at the end of 2019 to about 50 million by the spring of 2022. Exactly the way these emerging markets are draining theirs today. And when the savings ran out, that meant no more dollars. And a country that runs out of dollars runs out of the things that dollars buy. The fuel lines in Sri Lanka stretched for literal miles. And then they ran out completely. The power went off for hours every single day. Medicine got scarce.

[00:07:34]Food prices went through the roof and that July ordinary people had had enough. They marched on the presidential palace in such numbers that the president of the country fled in the middle of the night. So it's not a number on a screen or a chart. It's a head of state climbing onto an airplane to escape his own people. And here's why this time it's a little bit bigger. A tourism crisis in Sri Lanka is a relatively isolated thing. A global energy crisis is not. It's systemic. So, the odds of this jumping from one country to another aren't small. They're actually relatively high. Now, most people like to listen to what governments say. I would rather watch what they do, especially the quiet, strange things that they would prefer you didn't notice because right now the US government is doing two of them. So, first, the United States is draining its strategic petroleum reserve, the national emergency oil tank, the one you only ever crack open in a true crisis.

[00:08:38]And they're doing it actually the fastest pace on record. But here's the strange part. A lot of that fuel, the majority, isn't going to Americans. It's being shipped overseas. Now, hold on to that for a second. The second thing they're doing is they have quietly lifted their sanctions on Russian oil.

[00:08:56]not once but twice in the middle of a war in which Russia is helping target American forces. So why on earth would they do either of those two things? And it's the same reason for both. If desperate countries can get oil from America's emergency tank or from a suddenly legal Russia, it keeps the global oil price down for a little bit longer. And a lower oil price means countries have to sell fewer treasuries to afford that fuel. So these moves were never really about oil. They're about protecting the treasury market, keeping the most fragile countries from selling so hard that one of them falls and starts the cascade. Now read that back because that's the tell. The US government is burning its own emergency reserves and unsanctioning its enemy's oil to keep a distant emerging market from going bankrupt. If the global system were doing just fine, you would not need to do any of that. So the only question left is does oil go higher?

[00:09:59]Because if this is what was happening at a $100 oil or $90 oil, what happens if it gets significantly more expensive?

[00:10:08]And in late May, Neil Chapman, a senior vice president at Exxon, one of the world's largest oil companies, stood up at an investor conference and said this.

[00:10:18]We're approaching unheard of inventory levels. I mean, really, really low levels. The cushion the world's been living off of, the oil sitting in reserves and storage tanks around the globe, is almost gone. America's strategic petroleum reserve hasn't been this low since the 1980s. And Chapman put a clock on it. He said, "You can debate whether we hit these lows in 2 weeks or 3 weeks, but once we get to that point, you will see the price shoot up." And his expectation for where the price goes, $150 to $160 a barrel. Now, pick up that range I asked you to hold earlier. Everything you just watched from, you know, Turkey selling its treasuries, then its gold, its emerging market peers selling as well. That happened with oil between 70 and $105.

[00:11:09]Exxon's number for what's coming is 150 to 160. So, let's ask the question that matters. If selling the gold is what $90 oil looks like, what happens at 150?

[00:11:21]Especially if the treasuries and the gold are already sold, what happens to those economies at that point? And here's what almost everyone gets wrong.

[00:11:30]The instinct is to think that this just scales, right? If $90 oil caused some selling, then $150 oil would cause more, right? A bigger version of the same thing. But that's not quite accurate.

[00:11:43]And and here's why. $90 oil has been survivable for the reasons we discussed, right? Three cushions that have been quietly soaking up the blow. Number one, the oil in storage tanks around the world. As the straight choked supply, countries drew down their storage, their internal storage instead of bidding the price to the moon. And number two, the US emergency reserve has been pumping oil into the global market at a record pace to keep prices down. And three, the reserves of the exposed countries themselves. Right. When Turkey needed dollars, it had 15 billion in treasuries to sell before it ever touched its gold.

[00:12:20]At $90 oil, those cushions absorbed the hit. The selling was real, but it was orderly and the system held. By the time oil hits 150, all of those buffers will be gone. Global inventories are already at record lows and falling. The US strategic reserve is at its lowest level since 1983 and dropping. and the exposed countries will have already sold much if not all of their treasuries. Now, let me show you what a shock looks like when the cushions are gone. August 14th, 2003, a single power line in Ohio was sagging in the summer heat and it got tangled in an overgrown tree. And minutes later, 55 million people across eight US states and Canada were sitting in the dark. So, what happened? 55 million power lines didn't fail. just one did. But when that first line tripped, the power it was carrying didn't vanish. It pushed onto the next line, which then overloaded and tripped, which pushed its load onto the next one, which tripped. Each failure made the next one worse, and the entire northeast of the continent went down in under 10 minutes. Now, here's the part that matters. There was no flicker, no dimming, nothing to warn anybody. The power was at full strength and steady right up until it was gone. In the control rooms, operators were staring at screens that said the system was stable minutes before it collapsed.

[00:13:50]That is how a connected system fails.

[00:13:53]Not slowly, not with a warning you can act on all at once. One domino hitting the next and they all fall down.

[00:14:01]Starting with whatever point was carrying the most load. So hold that picture over the financial world. Every country is a power line. The dollar and the US treasuries underneath it are the grid that they are all plugged into. And the closure of Hormuz is making some of those power lines sag. A shock that lands on a grid with no slack left doesn't get absorbed. It lands square and it breaks two things at once. First, the most exposed countries run out of things to sell and they start going Sri Lanka circa 2022. They can't just sell more treasuries to buy oil because the treasuries are already gone. And second, all that forced selling drives the US interest rate up through the one level it cannot survive. There's there's a number somewhere around 5% on the 10-year Treasury, above which America's interest bill on its debt stops being manageable and starts compounding on itself. The cushions are what kept yields below that line. Take them away, force the selling, and yields punch right through that line. And on the other side of that line, the United States has exactly two choices left. let the bond market break and default on their debts or print a record amount of currency to stop it. Now, spoiler alert, empires throughout history have always chosen the same option when faced with that choice. Do you know what it is?

[00:15:29]They print. Now, you might be thinking, "Look, but Jay, the straight might open maybe tomorrow." And and yeah, it might.

[00:15:36]Every single week since early March, we've heard we are a few days away from a peace deal. And I genuinely hope that this time it's real because if it is, the whole system stabilizes. The oil price falls, the pressure drops, the emerging markets steady themselves, and we all go back to arguing about something else. That's the offramp.

[00:15:57]That's the good ending. Just by the way, don't mistake a reprieve for a pardon.

[00:16:02]Even if the straight opens tomorrow, the destination of the US dollar doesn't change. Only the timetable. Hormuz didn't start this fire. It just poured gasoline on it. So, let me wrap up what this is really all about. The thing I said that Turkey was just the first crack in every money that has ever run the world eventually lost its crown.

[00:16:24]Right? The Roman daenarius, the gold dinar, the Islamic empires, the paper money of Imperial China, Dutch Gilder, British pound, right? Rome, Baghdad, Beijing, London, different countries, different continents, different currencies, same ending. every single one. It always ends the same way. The country at the center, gets too deep in debt, prints too much of its own money, and the world slowly stops trusting it.

[00:16:49]And one day, the United States will either default or it will print so many dollars to avoid that default that the dollar quietly bleeds away its value instead. That's the fire. That's where this ends. So, the question isn't where are we going. The question is which dominoes will fall next? And in what order? Two years ago, nobody had horm closes on their list. A black swan reshuffled the whole board. If the straight had never shut, the same ending would still be coming, just on a different schedule with the dominoes falling in a different order. So that's what I'm actually watching. Not a chart, not a number. I'm watching a country, the next one to run dry the way Sri Lanka did in 2022. And right now, the most likely candidate is Turkey. It already sold its treasuries and started selling its gold. Nobody is further down the road. Now, it might not be Turkey, and I can't promise which one goes first. And a shock that nobody sees coming could push a different country over the edge first. But one of them goes, and the day they do, the day a real economy actually collapses the way Sri Lanka did. But this time, as part of a systemic crisis, is the day this stops being a forecast and becomes the news.

[00:18:06]Because that collapse isn't the end of the story. It's the start of a cascade.

[00:18:11]And the fear it sets off spreads to the next country and the next. Each one selling it treasuries to buy oil. Each sale pushing the price down. Each drop scaring the next country into selling two until it reaches the one market the entire system is built on. The United States, the biggest domino of them all.

[00:18:29]Okay. So, what's the point, Jay? Where you're watching this from changes how fast this reaches you. not whether it does. If you live in the United States or a comparably wealthy country, you're probably not going to wake up to empty fuel pumps. Your version is probably slower and quieter. It's inflation. All that selling eventually forces the US to print. And every dollar printed makes the ones in your account worth a little less. The number in your savings stays the same. It just buys less food, less housing, less fuel, less rent year after year. You know this by now. But if you live in one of the exposed countries, and a lot of you do, I don't really need to explain any of this. You've likely lived through a currency losing its value, or you're watching it happen right now, or your parents told you how it felt last time. For you, this isn't a forecast. It's a memory, maybe a warning. But the lesson is the same on both sides of that line. And the thing that fails is paper, dollars, lera, rupees, pesos. When a government gets cornered, it protects itself by printing. And whoever is holding the paper pays the bill. And the things that survive or the things that cannot be printed. So I'm not going to tell you what to buy or sell. I don't give investment advice, things like that. I will tell you how I think about it. The most dangerous place to be is to keep your savings in the one that feels the safest at a time like this. And that's promises to be paid, IUS, and cash. The safer place is the things that can't be conjured up on a keyboard. The gold, the energy, the producers of raw materials, the real physical things that the world cannot run without. Now, the people who've already lived through this, they know that in their bones. And if the straight reopens tomorrow, and I'm wrong, owning those things early cost you almost nothing. But if it stays shut, they're what holds their value when the paper loses its. One side of that bet costs a little. The other protects everything you've saved. The countries on the edge always fall first.

[00:20:35]But they're never the end of the story.

[00:20:36]They're the warning that a cascade has already begun. And then it's moving one domino at a time toward the biggest one of all, the dollar that every other currency and every saver on earth ultimately leans on. So, Turkey sold almost all of its treasuries and now they're selling their gold. And now you know why that matters and what to watch next. Honest question, what am I missing? Let me know in the comments.

[00:21:04]I'm Jay Martin and this is the J Martin Show. If you enjoy my content, do me a favor, hit like, click subscribe, but most importantly, share this video with a friend, somebody that you think needs to watch it. I publish content right here every single Saturday and I look forward to seeing you next week.