South Korea Central Bank Considers Re-evaluating Gold Reserves

At the London Bullion Market Association conference held in Kyoto, Japan, officials from the South Korea Central Bank hinted at a potential resumption of gold purchases. This comes as the world witnesses a growing trend of "gold buying" by central banks, while the South Korea Central Bank alone has remained stagnant in increasing its gold reserves for twelve years.

Media reports indicate that Kim Hong-jun, an official at the bank, stated on Tuesday that the South Korea Central Bank would consider increasing its gold holdings in the medium to long term and would closely monitor the market to determine the appropriate timing and size of purchases.

With increasing global financial uncertainty and rising demand for safe-haven assets, there is growing interest in understanding why the South Korea Central Bank chose a different path and why it is now signaling a potential shift.

Korean Gold Reserves Stagnant for 12 Years

According to recent data released by the World Gold Council (WGC), as of August, the South Korea Central Bank's gold holdings stood at 104.4 tons, remaining unchanged since 2013, currently ranking 39th among central banks globally. The South Korea Central Bank purchased 40 tons in 2011, 30 tons in 2012, and another 20 tons in 2013, and has since refrained from increasing its gold reserves for twelve years.

During this period, its ranking has also declined from 32nd at the end of 2013 to the current 39th. If the International Monetary Fund (IMF, ranked 3rd) and the European Central Bank (ECB, ranked 13th) are included, the South Korea Central Bank's ranking would fall to 41st.

This stagnation contrasts with the recent trends of central banks worldwide. To counter the multiple risks of global trade tensions, geopolitical instability, and declining confidence in the US dollar, major central banks are increasing gold allocation. A survey conducted by the World Gold Council from February 25 to May 20, involving 73 central banks, revealed that 95% of respondents believe that "global central bank gold reserves will increase in the next 12 months," and 43% of the responding central banks predicted that "gold reserves in their own country would also increase."

In contrast, the South Korea Central Bank continues to maintain a "wait-and-see attitude." At the audit conducted by the Planning and Finance Committee of the National Assembly at the headquarters of the South Korea Central Bank in Jung-gu, Seoul on the 20th of last month, members of parliament Chung Il-young and Ahn Do-je pointed out that "only the South Korea Central Bank has not increased its gold reserves." Governor of the South Korea Central Bank Lee Chang-yong responded, "There are no plans to increase gold holdings in the short term."

Why Did the South Korea Central Bank Stop Buying Gold?

There are three main reasons why the South Korea Central Bank stopped buying gold.

First, over the past decade, the returns on risky assets such as stocks have been significantly higher than gold. The S&P 500 index rose from 1848 points at the end of 2013 to 4769 points at the end of 2023, an increase of 158%. Over the same period, the global gold price rose from $1205 per ounce to $2062, an increase of only 71%.

Second, its foreign exchange reserves have declined. The South Korea Central Bank's foreign exchange reserves peaked at USD 469.2 billion in October 2021 and then decreased to approximately USD 420 billion by the end of last year. Lee Chang-yong explained, "When foreign exchange reserves increase, consideration can be given to purchasing other types of assets, but reserves have been decreasing over the past two or three years, and the situation is not favorable."

Third, "psychological shock." The South Korea Central Bank purchased a total of 90 tons of gold between 2011 and 2013. At that time, the global gold price rose from $200 per ounce in the early 2000s to $1900 in 2011, and foreign exchange reserves were more abundant than before. However, the gold price sharply declined to the $1100 per ounce range in 2015, and it did not return to the $1900 level until five years later in 2020. This experience reinforced the South Korea Central Bank's "cautious mindset" regarding gold investment.

The conservative stance towards gold is not limited to "monitoring and not buying" at the central bank level but also extends to restricting private investment channels.

Korean retirement accounts offer only a few domestic gold ETF products, and most banks only allow investment in the ACE KRX Gold Spot ETF, which tracks domestic spot gold prices, which equates to artificially limiting investors' opportunities to be exposed to global gold price fluctuations. This closed investment structure can disconnect the gold asset prices of Korean investors from international markets, resulting in a so-called "kimchi premium" - i.e., an additional premium in Korean domestic gold prices compared to global gold prices.

Why Might They Change Their Minds Now?

Market experts warn that excessive caution could lead to "missing out on opportunities." With the Federal Reserve again turning towards interest rate cuts and the dollar weakening, the gold price is more likely to rise. A recent report by Sangsangin Securities in Korea predicted that "the average gold price will reach $4450 per ounce by next year, and may exceed $4800 by the end of the year."

In fact, the gold price has risen steadily this year, driven by geopolitical tensions, a weaker dollar, and rising inflation expectations. Not only the United States, China, and India, but also central banks in emerging markets such as Poland and Turkey are actively buying gold to diversify foreign exchange reserve risks. In particular, China, the "big buyer" in the gold market, has increased its gold holdings for the twelfth consecutive month until the end of last month, reaching 2303 tons, a historic high.

Experts believe that the South Korea Central Bank should re-evaluate the "strategic role" of gold from a long-term perspective. Although gold does not generate interest or dividends, its value as the "ultimate safe-haven asset" has become more apparent in the face of increasing political and economic uncertainty.

The proportion of gold in the South Korea Central Bank's foreign exchange reserves is only 2.8%, significantly lower than major countries such as Japan (7.0%) and China (7.0%). This means that in times of increasing economic uncertainty, there is a shortage of safe assets that can act as a buffer.

Korean researcher Choi Ye-chan stated, "Less than a year before Trump takes office, policy uncertainty is still difficult to eliminate, and the risk premium it brings will support the gold price floor. In particular, emerging market central banks continue to buy whenever the gold price falls, which provides strong support for the gold price."

Politicians have also called on the South Korea Central Bank to increase its gold reserves. National Assembly member Chung Il-young also pointed out, "Gold is not only a safe haven in a crisis but also a strategic asset for maintaining monetary sovereignty. Relying solely on foreign exchange assets centered around US Treasury bonds makes it difficult to cope with dollar fluctuations or geopolitical risks. The South Korea Central Bank should align with the trends of the times and incorporate the expansion of gold reserves into medium- and long-term strategic considerations."