South Korea announces Gold reserve expansion through domestic buying program

Central bank gold buying has surged in recent years. Net central bank gold purchases rose from an average of 473 tonnes between 2010 and 2021 to nearly 1,000 tonnes over the last four years.

Emerging market central banks have dominated gold buying, driving the surge in gold reserves, but a developed economy central bank recently announced plans to begin expanding its gold reserves through a domestic buying program.

On Monday, the Bank of Korea said it has established a framework to purchase gold from South Korean miners at international spot prices.

The last time the Bank of Korea expanded its gold reserves was 13 years ago. The country currently holds just over 104 tonnes of gold, making up about 1.1 percent of the country’s total reserves.

Bank of Korea Reserve Management Group head Jeong Hee-sup said the central bank has also started purchasing gold ETF shares.

"With geopolitical risks becoming a persistent feature of the global environment, interest in gold as a safe-haven asset has grown significantly among central banks," Hee-sup said.

He emphasized that the domestic gold purchases are part of a long-term strategy to expand the country’s gold reserves.

"We do not plan to make a large purchase all at once. We intend to gradually increase the share of gold according to medium- and long-term needs."

The Korea Exchange and the Korea Securities Depository will facilitate the transactions, with domestic gold producer LS MnM and Korea Zinc supplying eligible gold.

The two Korean gold miners produce 4 to 5 tonnes of gold annually. Officials say the Bank of Korea will purchase some of that output “when market and reserve management conditions are favorable.”

The structure of the scheme will allow the Bank of Korea to settle the transactions in Korean won, meaning it will not have to dip into its foreign exchange reserves.

The gold will reportedly be stored in South Korea. Most of the country’s gold reserves are held in London vaults.

Analysts say that the move won’t likely impact the domestic gold price because the central bank plans to only buy gold intended for export at contract prices. However, it will mean less gold flowing into the global supply.

Central banks have been buying gold to lower their exposure to the U.S. dollar. Many countries have become wary of the U.S.’s weaponization of the currency and the fiscal irresponsibility of the federal government with its borrowing and spending out of control. During a central bank panel discussion in London last month, Hee-sup indicated that these concerns are top of mind in South Korea as well.

“Given gold's role as an inflation hedge and its potential as an alternative to the U.S. dollar, it's evident that gold should be considered one of the viable assets from a medium- to long-term perspective.”

Notably, South Korea holds far less gold than most developed economies. It was aggressively expanding its reserves between 2011 and 2013. As the Economic Times of India put it, “the timing appeared disastrous.”

The yellow metal peaked at $1,920 per ounce in September 2011, and then tumbled to $1,180 in 2013, a 38 percent decline. By 2015, the unrealized loss grew to 1.8 trillion won. The South Korean government and central bank faced heavy criticism for making a bad investment decision and ended its purchasing program in 2015.

At $4,000 an ounce per day, the decision looks pretty good. The 90 tonnes of gold purchased during that period are now worth about $7 billion more than the Bank of Korea paid for it.

As already noted, South Korea is part of a broader central bank gold buying trend.

Last year was the fourth-largest expansion of central bank gold reserves on record, at 863 tonnes. That was down 21 percent year-on-year, but still well above the 2010-2021 annual average of 473 tonnes.

The all-time high was set in 2022 (1,136 tonnes). It was the highest level of net purchases on record, dating back to 1950, including since the suspension of dollar convertibility into gold in 1971.

Last month, the European Central Bank confirmed that gold had overtaken U.S. Treasuries as the world’s top reserve asset.

According to an Official Monetary and Financial Institutions Forum (OMFIF) report, this shift toward gold has been “driven by protection against geopolitical risk and growing doubts about the stability of the international monetary system.”

OMFIF head of research Andrea Correa said she thinks this trend will continue into the foreseeable future.

"Gold is not moving anywhere. Reserve managers of the central banks are still very bullish on gold. Despite the fact that the gold value itself keeps rising, they are still demanding it."