The Bank of Korea (BOK) has ended a 13-year hiatus from the gold market, signaling a major strategic shift by resuming purchases and expanding its exposure to gold exchange-traded funds (ETFs). This move marks a departure from the central bank's historically cautious approach, which was often influenced by political pressures, and aligns it with the global trend of central banks increasing their gold reserves.
The BOK announced a medium-to-long-term plan to increase gold's share in its foreign exchange reserves. It will also establish a new channel to purchase gold from domestic producers for export purposes. Additionally, the central bank has started buying gold-backed US ETFs, which are classified as securities rather than gold in official reserve statistics, further diversifying its holdings.
The decision to restart gold purchases ends a lull that began in February 2013. Jeong Hee-seop, head of the BOK's reserve management department, cited rising geopolitical risks as a key driver. He noted that heightened market attention to gold's safe-haven status, combined with a price retreat from recent highs, has reduced the cost pressure, making it an opportune time to expand holdings.
Gold's Tiny Share Creates Growing Pressure for Change
The BOK currently holds 104.4 tonnes of gold, ranking 40th among the 100 countries tracked by the World Gold Council. However, gold accounts for a mere 3.5% of its total foreign exchange reserves, placing it 98th in the ranking. This is severely disproportionate for a nation with the world's 13th-largest foreign exchange reserves, trailing only Chile and Colombia in this metric.
This structural imbalance is rooted in political constraints. The BOK expanded its gold holdings to 104.4 tonnes under former governor Kim Joong-soo during his tenure from 2011 to 2013. However, after gold prices fell, the central bank faced severe criticism during a 2013 parliamentary audit. Lawmaker Kim Hyeon-mi accused the BOK of "failing to anticipate the gold price trend, causing national losses," which forced the suspension of the buying program.
A former senior BOK official indicated that the intense political backlash pushed the bank to instead increase allocations to US stocks. While this yielded decent returns, the internal consensus against further gold purchases has eroded, given the recent geopolitical instability and the actions of other central banks.
Price Correction Provides a Window for Entry
Despite a significant pullback this year, gold's medium-to-long-term outlook remains robust. According to the World Gold Council, the price hit a peak of $5,020 per troy ounce in February before falling 20% to $4,050 by August 3. Even at the current level, the price is roughly 150% higher than the $1,627 per ounce in February 2013, when the BOK halted its purchases, translating to an annualized compound return of about 8%. The BOK's gold holdings are valued at $4.79 billion based on the average purchase price, but at current market prices, the valuation is approximately $12 billion.
Jeong Hee-seop stated that the decline from the peak has alleviated the price pressure, making this an opportune moment to re-enter the market.
Domestic Sourcing and Local Storage
The BOK has introduced a novel mechanism for its procurement. It plans to purchase gold refined by South Korean companies such as LS MnM and Korea Zinc. This gold, classified for export due to a lack of domestic sales channels, will be stored with the Korea Securities Depository. The specific location is not being disclosed for security reasons.
Currently, all of the BOK's gold is stored with the Bank of England. Jeong Hee-seop explained that the new approach aims to diversify gold sourcing and storage locations to mitigate geopolitical risks. It also offers procedural convenience for purchasing gold with South Korean won. This practice of sourcing and storing gold domestically, outside of producing countries, is relatively uncommon, with the Philippines and Mongolia being among the few other nations to adopt it.
Sustained Global Central Bank Gold Buying Trend
The BOK's shift aligns with the accelerating global trend of central banks boosting their gold reserves. Amid rising risks of US financial sanctions, central banks are reducing their reliance on dollar-denominated assets by increasing their gold holdings.
World Gold Council data shows that from 2024 to the end of July, Poland was the top buyer with 255.2 tonnes, followed by China with 96.1 tonnes and India with 76.9 tonnes. As of last month, the largest gold reserves were held by the US (8,134 tonnes), Germany (3,350 tonnes), Italy (2,452 tonnes), and France (2,437 tonnes). China and Russia, which are actively reducing their US Treasury holdings, rank fifth and sixth with 2,332 tonnes and 2,292 tonnes, respectively.
A survey by the World Gold Council of 74 central banks last month found that 45% (33 countries) plan to increase their gold reserves within a year, with 60 countries expecting their holdings to grow over the next five years.
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