South Korea returned to the gold market in July, adding 16 tonnes to its reserves in the latest move by a central bank to take advantage of falling prices to accumulate bullion.
The central bank said on Thursday that the purchase, its first since November, was part of an effort to diversify its portfolio amid turmoil in sovereign debt markets.
“Gold is a safe-haven asset so higher exposure to gold can boost the credibility of our foreign reserves,” Lee Jung, head of investment strategy at the Bank of Korea’s reserve investment division, told the Financial Times.
Activity by central banks, which hold one-sixth of the gold ever mined, is a major influence on the gold market. Led by emerging market buyers in Asia and Latin America, central banks last year bought the most gold since the collapse in 1971 of the Bretton Woods system of exchange rates, which pegged the value of the dollar to gold.
Analysts say that the central bank buying has assumed an important role in the market as traditional buyers – such as Asian jewellery consumers and western hedge funds – have stepped back this year. Gold prices have fallen 20 per cent from a record high of $1,920 a troy ounce to a low of $1,527 in May, but since then have rallied to trade at $1,592 on Thursday.
“Central bank activity is in part filling in for the tame retail physical buying from the likes of India of late by helping gold on the downside and inserting a price floor,” said Edel Tully, precious metals strategist at UBS.
The Bank of Korea has bought 56 tonnes since it began purchasing gold last June, making it the biggest buyer among central banks that regularly disclose their holdings after Russia. It now holds 70.4 tonnes, valued at $2.98bn.
Lee said the purchase was “part of our long-term diversification strategy and not because of short-term conditions in international financial markets”.
South Korea’s $314.4bn foreign exchange reserves, the world’s seventh-largest, are heavily allocated to sovereign bonds.
Although the Bank of Korea’s gold reserves remain relatively small at just under 1 per cent of the country’s total foreign reserves, the decision to invest meaningful sums in the asset reflects a change of tack.
The bank’s investment last year of $2.1bn in gold came as the combination of the eurozone debt crisis and Standard & Poor’s downgrade of US debt prompted arguments that developed countries’ sovereign bonds were no longer a “safe haven” asset class.
Eugene Kim, a senior investment officer at the Bank of Korea, said this year the bank’s gold reserves remained small relative to its peers. Economists expect further purchases to follow.
“There are no currencies anywhere in the world that are considered safe,” said Glenn Levine, an economist at Moody’s Analytics. “In this environment, gold, as a fairly liquid, hard commodity-based option, comes into play. It ties in with broader themes of global rebalancing away from the west.”