BOK to Buy Physical Gold After 13 Years... "Lower Gold Prices Ease Burden"

The Bank of Korea (BOK) is resuming its purchases of physical gold for the first time in 13 years.

The central bank is introducing an unprecedented approach by purchasing domestically produced gold intended for export through over-the-counter (OTC) transactions.

The BOK's Foreign Exchange Department announced today that it established a cooperative framework last month with domestic gold producers including LS MnM, the Korea Exchange (KRX), and the Korea Securities Depository (KSD) to lay the institutional foundation for purchasing domestically produced gold.

The BOK plans to purchase export-bound volumes from domestic gold producers at international gold prices, utilizing the existing trading and settlement infrastructure of the Korea Exchange and the custody infrastructure being prepared by the Korea Securities Depository.

Specifically, when requested by companies such as LS MnM and Korea Zinc, the BOK will consider purchasing a portion of unconsumed domestic export volumes among the gold produced as a byproduct during the refining of copper or zinc.

Under this system, if companies propose tradable volumes and preferred timing based on domestic and international market prices, the BOK will determine whether to proceed by comprehensively considering its gold management plans and market conditions.

The BOK noted that the two companies produce 40 to 45 tons of gold annually, of which about 10%, or 4 to 5 tons, has been exported.

This method of purchasing physical gold in the domestic currency (Korean won) differs from past practices where gold was traded in U.S. dollars overseas.

It offers the advantage of enhancing currency hedging effects while allowing the storage location to be kept within South Korea.

Previously, the BOK's gold holdings were stored in the vaults of the Bank of England, the British central bank.

Additionally, to minimize the impact on intraday prices in the domestic gold market, the BOK decided not to trade openly on the exchange, but rather to adopt a bulk trading method through prior consultations on price and volume with producers over-the-counter.

However, the exact timing and scale of the purchases have not yet been determined.

The BOK stated, "The actual timing of purchases will be decided by considering various preparations related to gold trading, gold producers' export plans, and the BOK's gold management plans."

The BOK also disclosed on the same day that it made small initial purchases of exchange-traded funds (ETFs) based on gold as an underlying asset in the form of securities during the second quarter of this year.

This marks the first time in 13 years that the BOK has actively pursued gold purchases.

According to the World Gold Council, the BOK held 104.4 tons of gold in its foreign exchange reserves as of July this year.

This ranks 39th among central banks worldwide, excluding the International Monetary Fund (IMF) and the European Central Bank (ECB).

After purchasing an additional 40 tons in 2011, 30 tons in 2012, and 20 tons in 2013, the BOK has kept its total gold holdings capped at 104.4 tons up to this year.

Consequently, the BOK's ranking in gold holdings has continued to decline, falling from 32nd globally at the end of 2013 to 33rd at the end of 2018, 34th at the end of 2021, 36th at the end of 2022, 38th at the end of 2024, and 39th at the end of 2025.

The proportion of gold in total foreign exchange reserves also stood at a mere 3.5%, significantly lower than major countries such as the United States (83.1%), Germany (82.8%), Italy (79.1%), France (80.5%), and Japan (9.5%).

The BOK had previously maintained a cautious stance on additional gold purchases, citing lower liquidity and higher volatility compared to stocks or bonds, as well as the lack of interest or dividends and the costs associated with storage.

Even when central banks in other countries were aggressively buying gold, the BOK downplayed it as a measure to reduce dependency on the U.S. dollar.

While these drawbacks have not been completely resolved, the BOK explained that considering other circumstances, it decided that expanding the proportion of gold holdings over the medium to long term would be preferable.

The shift in the BOK's stance appears to have gained strong momentum following the inauguration of Governor Rhee Chang-yong.

Yi Chang-heon, head of the Investment Strategy Team at the Foreign Exchange Department, explained, "Recently, heightened geopolitical risks have significantly increased interest in safe-haven assets such as gold. Furthermore, the proportion of gold in our foreign exchange reserves is smaller compared to other countries, and the recent decline in gold prices has eased the burden of purchasing."

He added, "This does not mean closing off other gold procurement channels besides domestically produced gold, and we will be able to select the most advantageous channel."

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