Bank of Korea should assess gold investment principles

Bank of Korea should assess gold investment principles. April. 25, 2024 07:57. .
Bank of Korea Chairman Rhee Chang-yong is likely to face scrutiny during the 22nd National Assembly's state administration inspection due to the central bank’s lapse in timing regarding its gold purchases. The central bank will be questioned about its actions over the past 11 years while other countries were actively acquiring gold. During this period, gold futures surged from $1,618.3 per ounce in November 2022 to $2,448.8 per ounce by April 12 this year, marking a remarkable 51% increase in just a year and five months.

Throughout this timeframe, central banks worldwide have aggressively pursued gold acquisitions. The World Gold Council (WGC) reports a substantial increase in gold acquisitions by central banks globally, amounting to 1,082 tons in 2022 and a staggering 1,037 tons in 2023. This contrasts with the average annual acquisition rate of 457 tons observed between 2016 and 2021. Notably, China has sustained its gold acquisitions for 17 consecutive months since November 2022, amassing a total of 314 tons.

However, the Bank of Korea has remained on the sidelines of this 'new gold rush,' anchored by its past experiences. In 2010, during the National Assembly's inspection of state administration, then-Chairman Kim Jung-soo faced calls to bolster the Bank's gold reserves, which had stagnated for over 13 years at 39.54 tons. Against the backdrop of the European financial crisis and a surge in gold prices, South Korea's gold holdings comprised a meager 0.2% of its foreign currency reserves. Subsequently, from 2011 to 2013, the Bank of Korea prioritized the accumulation of 90 tons of gold. Yet, in October 2013, during another state administration inspection by the National Assembly, former Chairman Kim, often dubbed the "chairman who treasured gold," faced renewed criticism for the perceived tardiness in gold investment. Following the Bank's foray into gold, prices plummeted, resulting in an estimated loss of 1.2 trillion won (-21.5%). Kim Hyun-mi, then a Democratic Party lawmaker, censured Kim for inflicting financial losses on the state due to a failure to anticipate gold price fluctuations. Despite criticism, Kim defended the Bank's gold acquisitions as a preparatory measure for the ensuing decade.

Subsequent years witnessed a surge in gold prices, prompting a reevaluation of the Bank's gold investments. However, the specter of past losses lingers; the Bank of Korea's gold reserves have remained at 104.4 tons for 11 consecutive years. As of the end of 2023, gold comprises a mere 1.52% of South Korea's foreign reserves. In contrast, China and Japan possess 2,235.4 tons and 846.0 tons, constituting 4.33% and 4.37% of their foreign reserves, respectively. With a comparable economic scale to South Korea, Taiwan holds 423.6 tons, representing 4.32% of its foreign reserves.

Despite ongoing recommendations to expand gold reserves, the Bank of Korea's foreign reserve administration office contended that ensuring adequate liquidity in U.S. dollars remains a preferable strategy over expanding gold reserves. Their stance, articulated in a June 2023 report on the Bank's gold reserves status and future strategy, asserted uncertainty regarding the anticipated rise in gold prices, which were then hovering around $2,000 per ounce, nearing record highs. The Bank's prediction that gold prices would not rise further turned out to be inaccurate. If this hesitance did not stem from entrenched apprehensions, the Bank of Korea should be criticized for incompetence.

At a time of escalating geopolitical risks, increasing the proportion of gold in the state's foreign reserves is imperative for diversifying asset portfolios and bolstering foreign exchange rate stability over the long term. Moreover, the Bank of Korea must factor in potential future developments, including prospective interest rate cuts by the Federal Reserve, anticipated "American protectionism" following the U.S. presidential election, and potential dollar depreciation. However, this does not mean that the central bank should hastily make a foray into gold acquisitions, particularly at current record-high prices, which could exacerbate existing trauma amidst heightened price volatility. Instead, the Bank of Korea should thoroughly reassess its principles of gold investment and strategic direction, meticulously predicting trends in gold price fluctuations and judiciously timing future acquisitions.