[Inside Chodong] Gold Prices Soaring... Why the Bank of Korea Isn’t Buying Gold

Changhwan Lee, Deputy Head of the Economic and Financial Department

These days, the exchange-traded fund (ETF) attracting attention in our stock market is gold. The representative gold ETF, ACE KRX Gold Spot ETF, has seen continuous net purchases by individuals for 34 consecutive trading days from June 21 to July 7. The price has risen 24% from 12,440 KRW at the beginning of the year to around 15,500 KRW currently.

Gold ETFs are gaining attention because gold prices are soaring. The international gold price traded on the New York Mercantile Exchange surpassed $2,500 per ounce for the first time ever on the 12th and has since risen to $2,550. The gold price, which was around $2,070 per ounce at the start of the year, has increased by more than 22% in eight months.

Why are gold prices rising? It is because the possibility of a U.S. interest rate cut is increasing, causing the value of the dollar to decline. As the dollar weakens, the value of gold, considered an alternative asset, has risen.

Increased geopolitical risks have also been an important factor pushing gold prices up for years. Numerous geopolitical risks such as conflicts between the U.S. and China, the Russia-Ukraine war, and Middle East wars have raised gold’s value as a safe-haven asset. CNBC emphasized, "Gold thrives on uncertainty," adding, "The growing possibility of a U.S. interest rate cut, conflicts between Israel and Iran, the U.S. presidential election, and Russia’s attacks on Ukraine are driving gold prices higher."

Who is buying gold? Emerging market central banks are leading gold purchases. As of the first quarter of this year, central banks accounted for 23.4% of global gold consumption, significantly exceeding the 10-year average of 13%. Countries such as China, Russia, India, and T?rkiye, which are not allied with the U.S., have actively bought gold. This indicates they have chosen gold as an asset to replace the dollar. JP Morgan analyzed, "They are accumulating gold to reduce vulnerability to U.S. economic sanctions and lower dependence on the dollar."

What about Korea? The Bank of Korea’s gold holdings stand at 104 tons, accounting for 1.1% of the total foreign exchange reserves. Korea ranks 38th out of 127 countries in gold holdings according to the World Gold Council. Considering Korea’s foreign exchange reserves rank 9th globally, this is a relatively low ranking. The Bank of Korea last purchased 20 tons of gold in 2013 and has not made additional purchases for 11 years.

There are criticisms that the Bank of Korea missed opportunities to generate investment returns by not purchasing gold for a long time. In response to such criticism, the Bank explained that foreign exchange reserves must be maintained in a state that can be readily liquidated, and gold has lower liquidity compared to bonds or stocks, making it less practical. It also pointed out drawbacks such as the absence of cash flows like interest or dividends and the costs associated with storage.

However, if gold prices continue to rise, the Bank of Korea’s gold purchases could be a good choice in terms of diversifying foreign exchange reserves and improving returns. Citibank forecasted, "Gold investment sentiment will rise over the next 3 to 6 months," and predicted that gold could surpass $3,000 per ounce by mid-next year. UBS Global Asset Management also expects gold prices to approach $2,700 per ounce by mid-next year. According to a survey conducted by the World Gold Council (WGC) in June targeting 70 central banks, about 30% responded that they plan to increase their gold holdings next year as well.

In April, the Bank of Korea released data stating that gold prices at that time were overvalued. They expressed concern about the risk of chasing purchases due to public pressure and getting stuck at a peak. However, gold prices have continued to rise since then. If the Bank’s judgment was wrong, it raises the question of whether the Bank missed an opportunity to generate additional returns.