Bank of Korea Likely to Buy Gold for 1st Time in 11 Years

The Bank of Korea has not purchased gold for 11 years, but is expected to go on a gold buying spree, as the world’s central banks have bought the commodity since the global economic erupted in September last year.

A Bank of Korea official said yesterday, “The bank has begun to set up a plan to manage foreign exchange reserves for next year. It has also closely watched central banks in other nations and trends in the global gold market. Given the changing global financial environment, the bank`s management plan is critical.”

According to experts, the comment implies that the bank plans to buy gold soon. Korea has the world’s sixth most foreign exchange reserves but ranks just 56th in gold holdings.

China, which has the world’s largest foreign exchange reserves, has secretly bought 454 tons of gold over the past six years. This has intensified global competition to obtain more gold.

The amount of gold bought by China over the period is 32 times larger than the Bank of Korea`s gold reserves. The world’s central banks have rushed to buy gold since they believe the metal will replace the greenback when the dollar’s status as the world’s leading currency weakens.

○ Managing foreign exchange reserves in 2010

The bank has said nothing officially, simply saying, “We have made no decision on the purchase of gold and cannot say if we have considered it." It will finalize by November its plan to manage foreign exchange reserves for 2010, but experts forecast that the bank will have no choice but to buy gold soon.

Based on its explanation, the central bank is apparently fearful that its management plan could cause trouble in the global financial market and harm national interests.

Chang Min, the head of the Korea Institute of Finance’s macroeconomic research division who worked at the central bank until late last year, said, “The central bank has long considered several alternatives such as buying gold to diversify its foreign exchange reserve portfolio, which is heavily focused on dollars. It needs to secure more gold to diversify its investment.”

Kwon Sun-woo, the head of macroeconomic research at Samsung Economic Research Institute, said, “The Bank of Korea`s gold reserves are far less than enough. It should have bought more gold. Given the instability of the greenback, it needs to buy more gold.”

○ Lagging badly in gold reserve volume

As of late May this year, the Bank of Korea had 14.3 tons of gold, far less than that held by its counterparts in the United States (8,134 tons); Germany (3,413); China (1,054); Japan (765); Russia (537); Taiwan (424); the Philippines (154); Singapore (127); Thailand (84); Indonesia (73); and Malaysia (36 tons).

Worse, Korea is one of the world`s worst in the share of gold in its foreign exchange reserves -- 0.19 percent by market price and 0.03 percent by book value.

jaeyuna@donga.com