ETF Prices Surge 48% Since September as Gold Hits Record Highs
Domestic Gold Trades at 18% Premium Over Global Rates
Caution Urged: Chasing Rally May Lead to Losses as "Kimchi Premium" Narrows
As gold prices soar to unprecedented levels, domestic gold spot Exchange Traded Funds (ETFs) have increased their net assets by more than 1 trillion won in just one month. However, the so-called 'Kimchi Premium,' which refers to the gap between domestic gold prices and international market rates, is also widening, prompting investors to exercise caution.
According to the Korea Exchange on October 16, both 'ACE KRX Gold Spot' and 'TIGER KRX Gold Spot' closed at record highs the previous day, ending the session up 3.86% and 3.98% at 32,015 won and 15,295 won, respectively. After a prolonged period of stagnation until August, these two ETFs began a sharp upward trajectory last month, with their prices surging by more than 48% through the previous day.
As gold prices both domestically and internationally hit all-time highs, spot ETFs tracking these prices are also experiencing a steep rally. The ongoing U.S. federal government shutdown, now in its second week, and the rekindling of U.S.-China trade tensions have fueled a stronger preference for safe-haven assets. 'ACE KRX Gold Spot,' with assets under management exceeding 2.61 trillion won, saw an inflow of 385.6 billion won over the past month, ranking fourth among all ETFs. During the same period, its net assets increased by 992 billion won. In terms of trading volume for October (1.1902 trillion won), it ranks fifth among all ETFs.
The issue at hand is the soaring 'Kimchi Premium,' which refers to the price gap between the domestic and global markets. On the previous day, the price per gram of a 1kg gold bar in the KRX gold market was 227,000 won, 18% higher than the international gold price of 191,460 won. The Korea Exchange explained that, due to the unique characteristics of the KRX gold market-which requires quality certification from Korea Minting and Security Printing Corporation and storage procedures with the Korea Securities Depository-temporary investment demand has outpaced the supply of physical gold bars, leading to a wider price gap with the international market.
Investors are advised to be cautious, as investing in products with an excessive Kimchi Premium may result in losses during the price normalization process. In fact, in February, the gap between domestic and international gold prices exceeded 20%, reaching the highest level since the KRX gold market opened in 2014. However, as the price difference quickly narrowed, domestic spot gold prices dropped by about 19% within two weeks. On October 1, the Kimchi Premium, which had reached 16%, was cut in half, causing daily price fluctuations in spot gold to reach as much as 12 percentage points.
Lee Younghoon, a researcher at Samsung Securities, stated, "Since gold is a homogeneous asset, the law of one price tends to apply, resulting in a strong tendency for the price gap to revert to the mean. There is a high risk that this normalization process could lead to short-term shocks, so we recommend switching to international gold spot or gold futures."
Experts predict that the upward trend in gold prices will continue for the time being, but they also acknowledge the possibility of a correction. With the United States entering a rate-cutting cycle, some analysts suggest that U.S. Treasury bonds may become more attractive than gold, as they offer both price appreciation and high interest rates in the competition among safe-haven assets.
Kang Hyunki, a researcher at DB Securities, explained, "Looking at the history of financial markets, when the Federal Reserve maintained high interest rates, U.S. Treasury bonds were shunned, but when rates were cut, Treasuries surged and gold prices plummeted. Bearing in mind that gold prices could fluctuate dramatically in the future, it is advisable to allocate a portion of your safe-haven portfolio to both gold and U.S. Treasury bonds."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
