Bank of Korea Buys the Dip in Gold, Increases Holdings for the First Time in 13 Years!

The Bank of Korea has resumed its gold purchase program after more than 13 years and is simultaneously allocating to gold ETFs, marking a formal shift for the central bank, which had long avoided gold due to political pressure, as it joins the global trend of central banks increasing their gold holdings.

The Bank of Korea announced that it will increase the proportion of gold in its foreign exchange reserves over the medium to long term and introduce new channels to procure gold for export purposes from domestic gold producers. At the same time, the bank has begun purchasing US exchange-traded funds (ETFs) backed by gold, although these ETFs are classified as securities rather than gold in foreign exchange reserve statistics.

This resumption of gold purchases ends a 13-year hiatus since February 2013. Jeong Hee-seop, head of the foreign exchange reserve management department at the Bank of Korea, stated that rising geopolitical risks have heightened market attention to gold's safe-haven attributes, and with gold prices falling from their highs, price pressure has eased. The bank judged it necessary to increase its gold holdings.

Low Gold Proportion Builds Pressure to Increase Holdings

The Bank of Korea currently holds 104.4 tons of gold, ranking 40th among the 100 countries tracked by the World Gold Council.

However, gold accounts for only 3.5% of its foreign exchange reserves, ranking 98th out of 100 countries, higher only than Chile and Colombia. This is severely inconsistent with South Korea's status as having the 13th largest foreign exchange reserves globally.

The root of this structural imbalance lies in political constraints over the past decade. During the tenure of former Governor Kim Joong-soo (2011–2013), the Bank of Korea increased its gold holdings to 104.4 tons.

However, as gold prices fell, the bank faced strong criticism during a National Assembly audit in November 2013. Then-Democratic Party lawmaker Kim Hyeon-mi accused the bank of "failing to predict gold price trends, causing national losses." Consequently, the gold purchase plan was forced to halt.

A former senior official at the Bank of Korea stated that the intense political criticism led the bank to shift towards greater allocation in US stocks. While this yielded decent returns, consensus within the bank on continuing to delay gold purchases has gradually eroded given recent geopolitical turbulence and actions by other central banks.

Gold Price Decline Provides Entry Window

Although gold has corrected significantly this year, its medium- to long-term trend remains strong. According to data from the World Gold Council, gold prices hit a high of $5,020 per troy ounce in February this year, before falling to $4,050 on August 3, a drop of 20%.

Even so, current gold prices are still about 150% higher than the $1,627 per ounce level when the Bank of Korea stopped buying gold in February 2013, equivalent to an annualized compound return of approximately 8%. The Bank of Korea discloses the valuation of its gold at $4.79 billion based on average purchase prices; if calculated at current market prices, the valuation would be approximately $12 billion.

Jeong Hee-seop stated that the decline in gold prices from their peak reduced the price pressure for entry, which was one of the important considerations for the bank to resume gold purchases at this time.

Diversified Channels and Domestic Storage

In terms of procurement and storage arrangements, the Bank of Korea has introduced new mechanisms this time. The bank plans to purchase gold refined and processed by Korean companies such as LS MnM and Korea Zinc, which is classified for export purposes due to the lack of domestic sales channels. Storage matters will be entrusted to the Korea Securities Depository, with specific storage locations kept confidential for security reasons.

Currently, all gold held by the Bank of Korea is stored at the Bank of England. Jeong Hee-seop explained that this move aims to diversify gold acquisition channels and storage locations to reduce geopolitical risks, while also considering the procedural convenience of purchasing gold in Korean won.

For non-gold-producing countries, purchasing and storing gold domestically is not common; the Philippines and Mongolia are among the few countries adopting similar practices.

Global Central Banks Continue to Increase Gold Holdings

The Bank of Korea's shift aligns with the broader context of global central banks accelerating their gold accumulation. Against the backdrop of rising risks of US financial sanctions, central banks are reducing their reliance on US dollar assets by expanding their gold reserves.

Data from the World Gold Council shows that from 2024 to the end of July this year, the National Bank of Poland led global gold purchases with 255.2 tons, followed by China (96.1 tons) and India (76.9 tons).

As of last month, the countries with the largest gold reserves were the United States (8,134 tons), Germany (3,350 tons), Italy (2,452 tons), and France (2,437 tons); China and Russia, which are reducing their US Treasury holdings, ranked fifth and sixth with 2,332 tons and 2,292 tons, respectively.

A survey of 74 central banks released by the World Gold Council last month showed that 45% (33 countries) plan to increase their gold reserves within a year, and 60 countries expect their gold holdings to continue growing over the next five years.

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