"As Gold Prices Soar..." Where Has the Bank of Korea Invested Over the Past 13 Years After Halting Additional Purchases? [BOK Focus]

Share of Equities in Foreign Currency Assets Rose from 6.1% to 10.2% Since 2013
Long-Term Returns: 'Global Indexes > Gold'... More Than Double in Some Cases
High Exchange Rates and US Investment Demands This Year
Additional Gold Purchases Unl

As gold prices have soared, surpassing $5,100 per ounce, the Bank of Korea's gold reserves have once again come under scrutiny. Since acquiring an additional 40 tons in 2011, 30 tons in 2012, and 20 tons in 2013-bringing its total holdings to 104.4 tons-the Bank of Korea has stopped purchasing gold. As a result, South Korea's ranking in global gold holdings fell from 34th at the end of 2013 to 39th at the end of last year. This has sparked criticism, with some questioning, "With gold prices skyrocketing, why hasn't the Bank of Korea bought more gold?" This article examines where the Bank of Korea has invested its foreign currency assets since halting gold purchases.

Share of Equities in Foreign Currency Assets Expands Above 10%... Returns Outpace Gold

The most notable trend is the increased allocation to equities. Since halting gold purchases in February 2013, the Bank of Korea has steadily diversified its foreign currency asset portfolio, focusing on equities and consistently raising their share. The proportion of equities in foreign currency assets was 5.7% in 2012, rising to 6.1% in 2013, 7.7% in 2016, and 8.6% in 2017. In 2021, as stock prices in major countries rose after the COVID-19 pandemic and the share of risk assets increased, the proportion of equities exceeded 10% (10.4%). The share expanded further to 11.4% in 2022 and remained above 10% (10.2%) in 2024. This allocation to equities in foreign currency assets is considerably higher than in some countries where assets are primarily composed of gold and government bonds, resulting in a higher gold proportion. The trend of increasing the share of equities likely continued last year as well.

Although detailed equity investment categories and returns are not disclosed, it is possible to estimate returns by considering that the Bank of Korea pursues relatively stable investments, tracking global indices such as the S&P 500 or MSCI. From March 2013 to January 23, 2024, the cumulative return of the S&P 500, including dividends and after dividend tax credits, was approximately 437%, more than double the return on gold (216%) over the same period. Under similar conditions, the MSCI index returned 303%, also outperforming gold. From a long-term perspective, the Bank of Korea's investment choices have not been unfavorable.

An employee at Hana Bank's Counterfeit and Alteration Response Center in Jung-gu, Seoul, is organizing US dollars. Photo by Yonhap News Agency

Priority on Safety and Liquidity... High Price Volatility Remains a Burden

Foreign currency assets other than equities are concentrated in bonds. This is the result of prioritizing safety and liquidity. A Bank of Korea official explained, "In line with the meaning of our country's final external payment reserve assets, we manage foreign exchange reserves by focusing on assets that can be immediately liquidated, even during instability in the international financial markets."

The Bank of Korea manages foreign currency assets by dividing them into cash-equivalent assets and investment assets. Cash-equivalent assets are managed using short-term government bonds, deposits, and other short-term financial instruments that can be quickly liquidated with minimal transaction costs, allowing for rapid response to routine foreign currency inflows and outflows or temporary increases in demand. Among investment assets, direct investment assets primarily consist of long- and short-term bonds issued in major international currencies, such as government bonds, government agency bonds, corporate bonds, and asset-backed securities, which offer both liquidity and stable returns. Since last year, equities have also been included in this category, as the Bank of Korea's Foreign Reserves Management Department began directly managing a portion of overseas equity investments that had previously been entirely outsourced. Assets entrusted to domestic and overseas asset management companies and the Korea Investment Corporation (KIC) consist of both bonds and equities.

The gold held by the Bank of Korea is difficult to sell for liquidity purposes. The very act of a central bank selling its gold holdings could be interpreted as a signal of liquidity shortage. Although gold prices have followed an upward trend in recent years, their historically high price volatility remains a concern. When the Bank of Korea resumed gold purchases in September 2011, international gold prices climbed to $1,900 per ounce, but by the end of 2013, prices had plunged to just above $1,200 per ounce due to eased concerns over the European debt crisis and the tapering of quantitative easing in the United States. At that time, the Bank of Korea faced bipartisan criticism from lawmakers, who argued, "With gold prices falling endlessly, how could you not foresee this and still purchase gold?"

Active Intervention in High Exchange Rates and Use of Investment Returns for US Investments... Further Gold Accumulation 'More Difficult'

Nevertheless, gold remains an attractive asset. During crises in the international financial markets, it serves as a safe haven, and during economic booms, it can be a hedge against inflation. However, this year, it has become even more difficult to consider the option of additional gold purchases. Recent developments in the foreign exchange market are not favorable for increasing gold reserves. At the end of last year, as expectations grew that the won-dollar exchange rate would rise further, supply-demand imbalances pushed the rate close to 1,500 won. In response, the foreign exchange authorities actively intervened in the market to defend the exchange rate. As a result, South Korea's foreign exchange reserves decreased to $428.05 billion at the end of last year, as some reserves were used to support the won.

South Korea's foreign exchange reserves had steadily increased until the second half of 2021, but have gradually declined since the end of October 2021, when they stood at $469.2 billion.

Another burden is that the Bank of Korea must secure up to $20 billion in cash annually for investments in the United States, drawing on returns from the management of foreign currency assets. While the Bank of Korea has previously reinvested interest and dividend income from foreign currency asset management to grow its assets, if these funds are used for US investments, the Bank may need to consider increasing investments in products with higher returns or higher dividends than at present. Gold, by its nature, does not generate interest or other returns. All of South Korea's gold holdings are stored at the Bank of England in the United Kingdom. Although there is some income from lending gold, most of this is used to pay storage fees.

In this context, Bank of Korea Governor Rhee Changyong has also stated that he does not plan to increase gold reserves in the short term. At the National Assembly's Strategy and Finance Committee audit in October last year, Governor Rhee said, "It has not been easy to consider acquiring new assets because foreign exchange reserves have been on a downward trend for over three years," adding, "If foreign exchange reserves begin to rise again in the future, there may be room to reconsider asset allocation."