[BOK Focus] "Gold Prices Will Rise Next Year"... Will BOK Make Purchases for the First Time in 10 Years?

Dollar Weakness Boosts Safe-Haven Gold Prices
Major Countries Increase Gold Reserves, But Bank of Korea Halts for 10 Years
Low Likelihood of Increasing Holdings Amid High Uncertainty

With the dollar expected to turn downward next year and the global economic slowdown set to intensify, the price of gold, a representative safe-haven asset, is anticipated to rise significantly. International gold prices have already shown strength, climbing from the $1,600 per troy ounce level in October to over $1,800 recently. This has sparked interest in whether the Bank of Korea, which halted gold purchases in February 2013, will resume buying gold after 10 years to enhance stability and profitability.

Bank of Korea Halts Gold Purchases for 10 Years

According to the World Gold Council on the 29th, the Bank of Korea's gold holdings have remained stagnant at 104.4 tons as of the third quarter of this year, marking about 10 years of no change. This places Korea 36th in the world, behind countries such as the United States (8,133.4 tons), Russia (2,298.5 tons), Japan (845.9 tons), and Thailand (244.1 tons). While foreign exchange reserves have increased from $327 billion to $416.1 billion (9th in the world) over the past decade, gold holdings have not increased, causing the proportion of gold in foreign exchange reserves to shrink to 1.2%.

Meanwhile, international gold prices have been soaring. After the Ukraine war intensified, gold prices rose to $2,046.3 per troy ounce on March 8, but then fell to the $1,600 range in October due to the 'King Dollar' effect from the Federal Reserve's aggressive interest rate hikes. Recently, however, prices have climbed back above $1,800. On the New York Commodity Exchange (COMEX), the world's largest gold futures market, gold futures prices have surged more than 10.5% cumulatively since last month.

Gold Prices Surge as King Dollar Weakens

Gold prices are likely to continue rising next year. Typically, gold prices move inversely to the dollar's value, and with the Fed expected to halt interest rate hikes next year, the dollar's strength is anticipated to ease. In particular, if the global economic recession accelerates due to high interest rates and inflation next year, demand for gold as a safe-haven asset could increase. Gold is an asset free from default risk, so it tends to rise when stock prices fall and geopolitical tensions increase.

A foreign exchange operations official at the Bank of Korea said about next year's gold price trends, "This year, gold prices fell sharply following the dollar's movement but rebounded in the latter half. If expectations for the end of the Fed's rate hike cycle spread further, it will act as an additional factor weakening the dollar, leading to a rise in gold prices." Somewhat surprisingly, Danish investment bank Saxo Bank, which previously predicted a surge in Bitcoin, recently forecasted that gold prices could rise by more than 60% next year, sparking controversy.

Will the Bank of Korea Resume Gold Purchases? Possibility Low

Attention is focused on whether the Bank of Korea will resume gold purchases after 10 years. According to the foreign exchange reserve management objectives, the Bank of Korea must prioritize safety when managing foreign exchange reserves and also seek maximum returns within constraints. Other central banks have already significantly increased their gold holdings. In the third quarter of this year, global central bank gold purchases reached a record high of 399.3 tons. This is interpreted as an effort to offset currency depreciation caused by inflation and to prepare for an economic crisis next year.

However, the likelihood of the Bank of Korea increasing its gold holdings immediately is low. The Bank believes that increasing gold holdings at this time would not significantly help in terms of safety, liquidity, or profitability. A Bank of Korea official explained, "Economic uncertainty will remain high next year, so we plan to manage foreign exchange reserves conservatively. While rising gold prices would generate profits, gold does not provide fixed income like bonds, so it cannot be considered a purely profitable asset."

Since former Governor Kim Joong-soo purchased a total of 90 tons of gold in five transactions between 2011 and 2013, political circles have debated 'investment losses,' leading to analysis that the Bank of Korea has no need to increase gold holdings and take on risk during uncertain times. At that time, when criticism grew over losses due to falling gold prices, former Governor Kim said, "We were looking ahead 10 years." In fact, the Bank of Korea's average gold purchase price was about $1,428.5, and at the current price ($1,817.4), the Bank has realized an unrealized gain of over $1.3 billion.