Koreans are buying stocks, but the Bank of Korea is buying gold

From 2011 to 2013, after learning a hard lesson from the Wall Street financial crisis, the Bank of Korea increased its gold holdings by 90 tons over three consecutive years. The country’s current gold reserves mostly stem from that period. However, after 2013, a continuous decline in gold prices led to much criticism of this investment. The central bank has not made additional gold purchases since 2013, and thus missed out on the surge in gold prices since 2020.

At present, the Bank of Korea holds 104.4 tons of gold, valued at $4.79 billion, accounting for 1.1% of its total foreign exchange reserves, which stood at $427.36 billion as of the end of June. According to data from the World Gold Council, this places the Bank of Korea 39th globally in central bank gold holdings, far lower than South Korea’s global GDP ranking. Moreover, the proportion of gold in South Korea's foreign reserves is also well below the global average.

After more than a decade of inactivity, the Bank of Korea has recently started to follow the global trend of diversifying foreign reserves into gold. However, unlike most other central banks that buy physical gold bullion directly from the market, the Bank of Korea has chosen not to move gold bars into underground vaults, but rather to use gold ETFs (exchange-traded funds) as an investment tool. Public filings show that in the second quarter of this year, the Bank of Korea made a large purchase of assets in the world’s largest gold ETF—SPDR Gold Trust ETF. By the end of June, its holdings were valued at $250.41 million, equivalent to about two tons of gold.

Traditionally, a significant portion of Korea’s gold has been stored in the vaults of the Bank of England. But by using gold ETFs, Korea has sidestepped the need for physical gold account transactions. This non-traditional approach is reminiscent of the Bank of France’s now-famous “gold maneuver” in financial markets last year. At that time, the Banque de France conducted a market-based transaction by selling old gold in the New York market, then repurchasing the same amount of new gold elsewhere, thereby completing the withdrawal of its last batch of gold custodized at the Federal Reserve Bank of New York. In doing so, it kept the overall physical gold reserve unchanged while relocating all gold reserves to domestic storage.