Breaking the Gold Price Ceiling... What Does the Bank of Korea's '4.79 Billion USD' Frozen for 12 Years Mean? [BOK Focus]

Gold Holdings Remain at 104.4 Tons Since 2013
Valued at $4.79 Billion for 12 Years at Purchase Price
Balancing Investment Asset Profitability and Foreign Exchange Operation Stability
Symbolic Meaning of Central Bank Gold Holdings... "Maintaining a Conservative Stance"

'$4.79 billion'. There is an item in South Korea's foreign exchange reserves, announced monthly by the Bank of Korea, that has recorded the same amount for 12 years. It is 'gold', which has recently attracted great attention as its price has skyrocketed. The Bank of Korea purchased an additional 40 tons in 2011, 30 tons in 2012, and 20 tons in 2013, holding a total of 104.4 tons of gold, and has since stopped further purchases. The foreign exchange reserves are recorded at the purchase price, so the gold held by South Korea has been valued at $4.79 billion for 12 years.

While South Korea's gold holdings have remained stagnant, other countries have been buying gold, causing South Korea's ranking in gold holdings by country to fall to 38th as of the end of last year. Although gold accounts for only 2% of South Korea's total foreign exchange reserves, why does the Bank of Korea not buy more gold?

Investment Asset Profitability vs. Foreign Exchange Operation Stability

Looking back at the current soaring gold prices, it can be said that the Bank of Korea missed an opportunity by not making additional purchases for 12 years. Recently, international gold prices are approaching the unprecedented '3000 dollars per troy ounce' era. Domestic demand exploded to the point that commercial banks even stopped selling gold bars. The market expects gold prices to continue rising for the time being due to surging demand for gold as a representative safe asset amid tariff bombs triggered by Trump.

However, the Bank of Korea explains that foreign exchange reserves must maintain their value safely and be readily convertible to cash at all times, so the pursuit of profitability must be within the scope where safety and liquidity are achieved. Since foreign exchange reserves must be operated as external payment reserves in times of crisis, the overall size of foreign exchange reserves and the domestic foreign exchange market situation must be comprehensively considered to adjust the ratio accordingly.

From the perspective of foreign exchange operation stability, gold investment is a lower priority. South Korea's foreign exchange reserves steadily increased until the second half of 2021 but have gradually decreased since the end of October 2021 ($469.2 billion). This is due to the impact of the U.S. Federal Reserve's policy rate hikes that began in earnest in 2022. As of the end of last month, South Korea's foreign exchange reserves were recorded at $411.01 billion. This is the lowest level in 4 years and 7 months since June 2020 ($410.75 billion), approaching the psychological support level of $400 billion.

The volatile foreign exchange market is also not favorable for expanding gold holdings. Last year, amid a strong dollar trend, an emergency martial law situation occurred at the end of the year, pushing the won-dollar exchange rate to threaten the 1,500 won level. In response, foreign exchange authorities partially used foreign exchange reserves to defend the exchange rate and implemented measures to reduce foreign exchange market volatility. In such a situation of increased domestic and international uncertainty and high exchange rate volatility, the need for immediately responsive assets such as the dollar grows even more.

The Symbolic Meaning of Central Bank Gold Holdings... Additional Purchases Difficult for the Time Being

Gold purchased by central banks is difficult to sell for liquidity purposes considering the signals that selling itself would send. Therefore, the timing of purchases must also be approached cautiously. The historically high price volatility of gold is also a burden. Last year, the countries actively purchasing gold despite the price burden were mainly China, which had increased demand for safe assets other than the dollar amid confrontation with the U.S., and Hungary, which faced increased demand for safe assets due to regional wars and crises.

The lack of profitability such as interest from holding gold is also a burden for mid- to long-term holdings. Currently, all the gold held by South Korea is stored at the Bank of England. Although lending gold generates rental income, most of it is used to cover gold storage fees.

The Bank of Korea is expected to maintain a conservative stance on additional gold purchases for the time being. While acknowledging that gold is one of the investment targets in terms of its inflation-hedging function and potential as an alternative to dollar investments, the Bank's existing position of approaching investment from a 'mid- to long-term perspective' remains unchanged. A Bank of Korea official said, "Currently, we are paying more attention to the trends of foreign exchange reserves and movements in the foreign exchange market," adding, "The timing and scale of gold investment will be handled from a mid- to long-term perspective."