The Bank of Korea will buy about one ton of physical gold produced in South Korea as early as December. If the purchase goes through, it will be the central bank's first gold buying in 13 years. The move follows indirect investment through exchange-traded funds in the second quarter, signaling a more active push into gold.
The BOK's Reserve Management Group plans to buy domestically produced gold at the end of this year, according to the office of Rep. Chung Tae-ho of the Democratic Party of Korea, a member of the National Assembly's Strategy and Finance Committee, on the 30th.
In materials submitted to Chung's office, the BOK said the necessary systems are expected to be in place around Dec. 14, allowing the first transaction to take place at that time. The central bank estimated the planned volume at around one ton. One ton of gold is valued at roughly 200 billion won ($140 million).
The BOK halted gold purchases in February 2013. It had ramped up gold investment until then, only to face fierce criticism from politicians when prices fell. But with geopolitical risks mounting and interest in gold as a safe-haven asset growing, and amid criticism that the BOK's gold holdings were smaller than those of other central banks, the bank decided this year to expand its reserves. It officially announced in August that it would resume buying physical gold. In the second quarter, it had already purchased $250 million worth of gold ETFs, which are classified as securities.
The most likely approach for the physical purchases is to buy volumes that domestic gold producers had planned to export. The arrangement is significant because it secures a channel for buying gold in won rather than foreign currency. That allows the BOK to build up safe-haven assets without dollar outflows, minimizing volatility in the domestic foreign exchange market. The Korea Exchange recently overhauled the trading, custody and settlement systems of its KRX gold market to support the BOK's purchases.
Chung said the BOK's decision to resume physical gold purchases after 13 years is a meaningful first step toward diversifying the country's foreign exchange reserve portfolio.
The BOK's gold holdings fall far short of those in major economies. As of the end of August, the central bank held 104.4 tons of physical gold, worth $4.79 billion on a book value basis. That accounts for just 1.1% of total foreign exchange reserves, or about 3.4% at market prices. The BOK ranks 39th in the world in gold holdings, according to the latest data from the World Gold Council.
