"Despite Clear Drawbacks of Gold's Illiquidity, Why the Bank of Korea Resumed Purchases After 13 Years"

BOK Resumes Gold Purchases After 13 Years... 'Two-Track' Approach
"Buying Physical Gold Destined for Export With Won"
Boost to Foreign Reserves, Gradual Expansion With a Mid- to Long-Term Perspective
"Gold ETF Purchases... Gaining Exposure

The Bank of Korea's decision to resume gold purchases after a 13-year hiatus was largely driven by the newfound ability to acquire physical gold within the domestic market.

A photo of gold bars is attached to the exterior wall of the Korea Gold Exchange Jongno Main Branch in Jongno-gu, Seoul.

There are clear advantages and disadvantages to central banks holding physical gold. Traditionally, the Bank of Korea has been reluctant to expand its gold holdings, largely because the gold it acquires cannot be easily sold for liquidity purposes. This is due to concerns that any “sale of gold by a central bank” might be seen as a signal of liquidity shortages.

Additionally, gold is a non-yielding asset, as it generates neither interest nor dividends. In times of rising interest rates such as recently, gold becomes a relatively unfavorable asset. Although the price of gold has risen significantly in recent years, its long-term return still falls short compared to stocks. While there is some profit to be made by lending gold holdings, storage costs diminish the overall gain, making significant profits unlikely. The Bank of Korea acquired 40 tons of physical gold in 2011, 30 tons in 2012, and 20 tons in 2013, building up a total of 104.4 tons, after which it made no further purchases. While the Bank of Korea halted additional gold purchases, other countries expanded their holdings, causing Korea's ranking in terms of gold reserves to fall from 34th at the end of 2013 to 39th at the end of last year.

Nevertheless, gold remains an attractive investment for foreign reserves. In international financial markets, gold serves as a safe-haven asset in times of crisis and as an inflation hedge during economic booms. Jung Hee-seop, Director General of the Bank of Korea's Foreign Exchange Reserve Management Department, said, "Geopolitical risks have become constant recently, and this has fueled growing interest in gold as a safe asset within the central bank community. Given our relatively low share of gold reserves, there is a need for expansion." He added that a recent price correction has somewhat eased the burden of buying gold. At the beginning of this year, gold prices soared to nearly $5,600 per ounce, but as of now, they have dropped to around $4,000 per ounce.

An employee is holding a gold bar at Korea Gold Exchange in Jongno-gu, Seoul. Photo by Yonhap News.

The biggest strength of this move, according to the Bank of Korea, is the “diversification of purchasing channels.” In particular, the ability to buy gold directly in won within Korea has been highlighted as a key advantage. By purchasing gold in won, instead of using the bank's existing dollar reserves, the Bank of Korea can effectively increase its foreign reserves. Jung explained, "The significance lies in the ability to increase foreign reserves, diversify storage locations to reduce geopolitical risk, and hedge by purchasing in local currency. Additionally, the Korea Exchange could see revitalization of the domestic gold market with new participants, contributing to the sound development of Korea’s gold industry."

There are two domestic gold producers: LS MnM and Korea Zinc. Last year, they produced a combined 40 to 45 tons of gold, some of which was exported as it was not consumed domestically. About 4 to 5 tons are exported each year. These companies typically prefer to sell domestically, since exports incur higher costs and logistical concerns. From their perspective, having the Bank of Korea as a major domestic buyer is an advantage. Since the Bank of Korea will only purchase gold that was originally intended for export, the impact on domestic gold demand and prices should be minimal. As the transactions are negotiated bulk deals, not on-market trades, the risk of distorting market prices is also low.

However, since purchases will only be made if manufacturers make a request and the Bank of Korea decides to proceed based on its operational plans and circumstances, acquisitions are expected to be gradual and on a smaller scale. Jung explained, "The banks will only receive requests when domestic prices are as favorable or better than export prices, but it is impossible to predict when those conditions will occur. Just because a request is made does not guarantee that the Bank of Korea will purchase all of it. Purchases will be made gradually and at a moderate pace, reflecting medium- to long-term needs."

Jung added, "Last year, domestic gold prices were higher than international prices, so export volumes fell sharply. Since it was more advantageous for companies to sell locally, requests to the Bank of Korea would not be expected in such conditions. Likewise, if the Bank of Korea wanted to buy gold in such a situation, it would likely turn to international channels."

The Bank of Korea already began purchasing gold ETFs in the second quarter of this year. Jung stated, "We started buying ETFs in the second quarter, albeit on a very small scale." ETFs are classified as securities, so they are not officially included in gold holdings for foreign reserve statistics. Nonetheless, since they provide exposure to gold, they are effectively regarded as (securities-based) gold held by the Bank of Korea. Holding gold through ETFs diversifies acquisition methods and allows for immediate response to market changes. Moreover, unlike physical gold, there is no need to disclose holdings every month, easing reporting burdens. However, large-scale purchases are disclosed to the U.S. Securities and Exchange Commission (SEC) at the end of each quarter. The scale of second-quarter purchases will be confirmed in mid-August.

This content was produced with the assistance of AI translation services.