Summary of Key Points
After a 13-year hiatus, the South Korean central bank has resumed its gold purchasing efforts: in the second quarter of this year, it purchased gold ETFs worth $250 million (which do not represent physical gold) and also plans to acquire locally produced gold bars. The aim is to diversify its foreign exchange reserves (currently, the US dollar accounts for 69.5%, far higher than the global average of 1.1%), as well as to hedge against geopolitical and inflation risks. This move is influenced by the ongoing gold purchases by central banks around the world, and it was made at a time when gold prices were declining. The strategy is "gradual and long-term"; therefore, it will not quickly change the composition of its reserves. However, this signifies a shift in South Korea's view of gold from a "low-return asset" to a "hedge and value-preserving tool."
Detailed Explanation
1. Why the sudden restart of gold purchases now? — Risk aversion and diversification of reserves are the main reasons
The South Korean central bank’s decision to buy gold is driven by a desire to reduce risk and diversify its assets:
- Dual pressures from geopolitics and inflation: Recent geopolitical conflicts (such as the Russia-Ukraine war) have increased global market uncertainty, highlighting the hedging properties of gold. Additionally, during periods of high inflation, gold can protect against currency devaluation (for example, when the US dollar weakens, gold typically rises in value).
- Other central banks are buying gold; South Korea cannot afford to lag behind: According to data from the World Gold Council, central banks worldwide purchased a net 289 tons of gold in the second quarter of this year, the highest amount on record for the same period. Other countries are accumulating gold reserves, and the South Korean central bank feels that its current gold holdings (1.1%) are too low compared to major economies, so it needs to buy more to avoid falling behind.
- High proportion of US dollars in reserves: 69.5% of South Korea’s foreign exchange reserves are in US dollars, which is significantly higher than the global average of 56.8%. If the US dollar depreciates or the US economy encounters problems, South Korea’s reserves could shrink. Buying gold helps to spread this risk (similar to not putting all eggs in one basket).
2. What new methods are being used for these gold purchases? — A combination of ETFs and locally produced gold bars
Unlike 13 years ago when only physical gold was purchased, the South Korean central bank is using two new approaches:
- Buying gold ETFs: This is similar to buying stocks; a gold ETF (such as the SPDR Gold Trust) allows one to indirectly hold gold without physically storing it. The central bank bought more than 670,000 shares worth $250 million, which are considered securities within its foreign exchange reserves and not physical gold.
- Purchasing locally produced gold bars: This supports local businesses and avoids disrupting the domestic market. The plan is to buy gold bars exported by two of South Korea’s largest gold producers (LS MNM and Korea Zinc), with annual purchases amounting to 4-5 tons. This approach also helps reduce the cost of gold by exempting the purchase from value-added tax (for the first time in over 60 years).
3. Why was the purchase of gold halted 13 years ago? — Sharp drops in gold prices and low returns
Between 2011 and 2013, the South Korean central bank purchased 90 tons of gold (accounting for 86% of its current holdings). However, in 2013, gold prices dropped from $1,675 per ounce to $1,180, ending a 12-year bull market. At that time, the central bank concluded that:
- Gold does not offer as high returns as stocks (it does not generate interest and only profits when its price rises).
- Selling physical gold was cumbersome and costly.
- There were nominal losses, which led to criticism from the political sector for wasteful spending. As a result, no further gold purchases were made for 13 years.
4. Can these new purchases immediately change the composition of reserves? — Difficult in the short term; it’s a long-term strategy
Raising the proportion of gold in reserves from 1.1% to a level similar to other countries (e.g., around 70% for the US and 60% for Germany) is almost impossible in the short term:
- The initial scale of purchases is small: The $250 million invested in ETFs and the annual purchase of 5 tons of locally produced gold bars is a tiny fraction of the total reserves of $427.3 billion.
- The central bank is cautious: It has made it clear that this is a "medium to long-term strategy" and will not focus on short-term price fluctuations in gold. Each purchase depends on factors such as supplier availability, pricing, and infrastructure, so large quantities will not be acquired all at once.
However, this change indicates that the South Korean central bank’s view of gold has shifted from an unprofitable asset to a necessary hedge. Over time, the proportion of gold in its reserves is expected to increase gradually.
5. What can ordinary people learn from this?
This situation reflects similar principles applied to personal financial management:
- Do not invest all your money in one asset (e.g., only stocks or only savings accounts); diversify your investments.
- Gold can act as a "ballast" that helps stabilize your assets during times of risk.
- Long-term investment is more reliable than short-term speculation (the South Korean central bank’s approach reflects this principle).
In summary, the South Korean central bank’s decision to buy gold is like adding an extra layer of protection to its financial reserves.