While Central Banks around the world are embarking on a "gold rush" to buy gold, the Bank of Korea (BOK) alone has not increased its gold holdings for 12 years. As global financial uncertainty grows and preference for safe assets rises, attention is focusing on why only the BOK is taking a different path.
◇BOK's gold holdings at 104 tons for 12 years… from 32nd to 39th in a decade
According to the World Gold Council (WGC) on the 25th, the Bank of Korea's gold holdings stood at 104.4 tons (t) as of August, ranking 39th among Central Banks worldwide. If including the International Monetary Fund (IMF, 3rd) and the European Central Bank (ECB, 13th), the ranking falls to 41st. The BOK bought 40 t in 2011, 30 t in 2012, and 20 t in 2013, and has since halted additional purchases for 12 years. During this period, the BOK's ranking fell from 32nd at the end of 2013 to 39th.
This stagnation stands in sharp contrast to the recent global trend. Major Central Banks are increasing their gold share to hedge against a mix of risks, including U.S.-China tensions, geopolitical instability, and weakening trust in the dollar. In a WGC survey of 73 Central Banks conducted from Feb. 25 to May 20 this year, 95% of respondents said "Central Banks' gold holdings will increase over the next 12 months." In addition, 43% of responding banks projected "their own countries' gold holdings will also increase."
By contrast, the Bank of Korea remains in "wait-and-see mode." At a National Assembly Strategy and Finance Committee audit held on the 20th at the BOK headquarters in Jung-gu, Seoul, ruling party lawmakers including Jung Il-young and Ahn Do-geol noted that "only the BOK is not increasing its gold holdings," but Bank of Korea Governor Rhee Chang-yong drew a line, saying, "We have no plans to increase gold holdings in the short term."
There are three main reasons the BOK stopped buying gold. First, over the past decade, risky assets such as stocks have delivered much higher returns than gold. The S&P 500 index, which was at 1,848 points at the end of 2013, rose 158% to 4,769 points at the end of 2023. Over the same period, international gold prices rose from $1,205 per ounce to $2,062, a gain of only 71%.
The second is a decline in foreign exchange reserves. The BOK's foreign exchange reserves peaked at $469.2 billion in October 2021, then fell to around $420 billion at the end of last year. Regarding this, Governor Rhee explained, "When foreign exchange reserves are growing, we can consider whether to purchase other types of assets, but over the past two to three years reserves have been declining, so the backdrop has not been favorable."
The third is past trauma. The BOK bought 90 t of gold from 2011 to 2013. International gold prices, which were in the $200-per-ounce range in the early 2000s, surged to $1,900 in 2011, showing a steep rise, and foreign exchange reserves were more ample than before. However, in 2015 gold prices plunged to the $1,100-per-ounce range, and it was not until 2020, five years later, that they recovered to the $1,900 level. This experience strengthened the BOK's "caution about gold purchases."
◇Gold could top $4,800 by the end of next year… "Need to consider expanding holdings"
However, the market warns that such caution could lead to "missed opportunities" in the long run. As a pivot to rate cuts by the U.S. Federal Reserve (Fed) becomes visible and the dollar weakens, gold prices are more likely to rise. In a recent report, Sangsangin Investment & Securities projected that "through next year, gold will average $4,450 per ounce and could top $4,800 by year-end."
Indeed, this year gold prices have been steadily rising on geopolitical tensions, a weaker dollar, and higher inflation expectations. Not only major countries such as the United States, China, and India, but also emerging market Central Banks such as Poland and Turkey are aggressively buying gold to diversify their foreign reserve portfolios. In particular, China, a "big player" in the gold market, increased its gold holdings for 12 consecutive months to a total of 2,303 t as of the end of last month. This is a record high.
Experts say the Bank of Korea needs to reassess the "strategic role of gold" from a long-term perspective. Gold has the drawback of offering no interest or dividends, but as political and economic uncertainty grows, its value stands out as the "ultimate safe asset." The BOK's gold share is only 2.8% of total foreign exchange reserves, very small compared with major countries such as Japan (7.0%) and China (7.0%). If economic uncertainty grows, it means there is a lack of assets that can serve as a buffer as safe assets.
Researcher Choi Ye-chan said, "With less than a year since Trump took office, it is difficult to see policy uncertainty ending, and the resulting risk premium will support the floor for gold prices," adding, "In particular, Central Banks in emerging markets, including China, are consistently buying whenever gold prices fall, strongly supporting the downside."
The political sector is also calling for an increase in gold holdings. Democratic Party of Korea lawmaker Jung Il-young said, "Gold is not just a crisis refuge but a strategic asset that protects currency sovereignty," adding, "It is difficult to respond to dollar volatility or geopolitical risks by operating foreign currency assets centered on U.S. Government Bonds alone, so the BOK also needs to review expanding gold holdings as a mid- to long-term task in line with the times."