(Mike Maharrey, Money Metals News Service) In August, South Korea announced plans to expand its gold reserves, but so far it’s only bought paper.
Now it looks like the country’s central bank is finally set to get the real thing.
To date, the Bank of Korea’s “gold” reserve expansion has involved buying shares of the SPDR Gold Trust ETF. According to a U.S. Securities and Exchange Commission filing, the Korean central bank purchased 679,765 shares of the ETF in Q2 of this year. The central bank’s ETF holdings were valued at ₩354.5 billion ($250.41 million) at the end of June.
There’s nothing wrong with ETF investing, but it isn’t the same as buying physical gold.
A gold-backed ETF generally tracks the price of gold, but other dynamics are in play, so it’s not a one-to-one correlation. And while this is a convenient way to play gold’s price, you don’t own any gold. You own paper.
That means South Korea has only expanded its paper reserves so far.
That appears about to change.
A Bank of Korea official said a transaction system to purchase physical gold from local producers will be up and running by December 14.
“After the transaction system is ready in December as planned, we plan to purchase.”
It remains unclear exactly how much gold South Korea plans to purchase. Officials say about 1 tonne of gold should be available to the central bank when purchases begin.
According to the August announcement, Korea Exchange and the Korea Securities Depository will facilitate the transactions, with domestic gold producer LS MnM and Korea Zinc supplying eligible gold. The bank will buy gold that would have been exported at contract prices.
The two Korean gold miners produce 4 to 5 tonnes of gold annually. Bank of Korea officials said they will purchase some of that output “when market and reserve management conditions are favorable.”
The scheme is structured so the Bank of Korea can 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.
The Bank of Korea hasn’t expanded its gold reserves in 13 years. The country currently holds just over 104 tonnes of gold, about 1.1 percent of the country’s total reserves.
Bank of Korea Reserve Management Group head Jeong Hee-sup said ever-increasing geopolitical risk has increased interest in gold as a safe haven, and 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.”
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 federal government’s fiscal irresponsibility. During a central bank panel discussion in London last summer, 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.”
Korea Investment and Securities analyst Jung Hyun-jong said the central bank’s renewed interest in gold is part of a broader trend in South Korea.
“In the past, jewelry demand accounted for more than half of the gold market, but the shares of investment and central bank demand have increased sharply in recent years. This suggests that gold is shifting in status from a simple consumer commodity to a financial asset and an alternative currency that can serve as a hedge against geopolitical risks, inflation, and currency depreciation.”
