Is South Korea About to Buy Physical Gold, Too?

The central banks of India, China, Thailand and Bangladesh increasingly appeared as gold buyers at the markets in the last few months. On Monday, South Korea publicly announced for the first time that the country would probably follow the path of other Asian countries to better diversify its holdings of foreign currency reserves in the near future.

South Korea is holding the fifth biggest currency reserves worldwide and analysts expect that potential gold purchases by the country's central bank will further boost the prices of precious metals. In Asia the fear of a second round of quantitative easing by the American central bank is spreading, which is why many of the large export nations intend to diversify a part of their currency reserves, mainly held in US dollars, into gold and other tangible assets. As reported yesterday, Japan will soon set up a sovereign wealth fund for the purchase of important strategic commodities, which shall mainly be financed by US dollars bought in the course of the recent market interventions. Asia is getting more and more concerned that the US Federal Reserve Bank will tacitly accept a further debasement of the US dollar in the future.

While South Korea is currently disposing of foreign currency reserves amounting to $290 billion, of which 63 percent are denominated in US dollars, the country has so far invested only 0.2 percent of its reserves in gold. This exposure to gold is comparatively small given that the global average of gold holdings per country amounts to 10 percent of their individual currency reserves. In an effort to change that, South Korea's central bank governor Kim Choong-soo told a parliamentary committee yesterday, the Bank of South Korea is considering buying gold soon. Nevertheless, Mr. Kim pointed out that the country would have to be careful and discreet when participating at the gold market, since the high volatility and the price development of gold demanded a careful handling of taxpayer's funds.

This commentary from Mr. Kim raises the question of the time frame, in which South Korea's central bank could become active at the markets. In the past, the country always preferred the purchase of US treasuries to reinvest its currency reserves. The underlying reason was that those papers were more liquid in comparison with physical purchases of commodities. Moreover, the external value of the Won could partly be controlled by this method. Because of the Federal Reserve Bank's monetary policy this does not seem possible anymore today. Critics are blaming South Korean officials for waiting too long with a diversification of the foreign currency reserves of the country. If one interprets Mr. Kim's commentary correctly, the central bank could wait for a correction at the gold market in order to use it for physical gold purchases. Sceptics already mentioned that the central bank should rather act now instead of waiting for a correction that might not even arrive to the desired extent.

Roman Baudzus

Goldmoney.com

All data and quotes sourced from Reuters.

Published by GoldMoney
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Written by Gillian Campbell

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