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South Korean Central Bank Looks to Gold Published: Monday, 18 Oct 2010 | 8:44 PM ET Text Size By: Christian Oliver and Song Jung-a in Seoul and Jack Farchy in LondonDiggBuzz FacebookTwitter More Share South Korea, holder of the world's fifth-biggest foreign exchange reserves, is considering buying gold to diversify its dollar-heavy portfolio, the country's central bank said, adding it would be cautious in making any final decision.
Even a small realignment of South Korea's reserves would have a powerfully bullish effect on the gold market [XAU=X 1326.45 2.85 (+0.22%) ]. With just 14 tons of gold - or 0.2 percent of its $290 billion reserves – Seoul is one of the smallest holders of gold among large economies. The world average is 10 percent, according to the World Gold Council, while countries such as the U.S., Germany and France hold well over 50 per cent of their reserves in gold.
Kim Choong-soo, governor of South Korea's central bank, told a parliamentary committee on Monday that Seoul would have to tread carefully because of record gold prices and market volatility. "We need to give careful consideration to the matter of increasing gold volumes in the foreign reserves," he said.
Nonetheless, his statement marks the first time the possibility of buying bullion has been seriously discussed in public by the Bank of Korea, which has in the past been dismissive of gold.
It comes as other Asian countries including China, India, Thailand and Bangladesh are stocking up on gold amid concerns that an escalating global currency war and a fresh round of quantitative easing in the U.S. will drive the value of the dollar lower. South Korea holds 63 percent of its reserves in dollars.
With emerging market countries buying and central banks in Europe halting their sales of bullion, central banks are set to become net buyers of gold this year for the first time since 1988, according to GFMS, a precious metals consultancy. That shift helped drive prices to a new nominal record of $1,387.10 a troy ounce on Thursday, up 27 percent since the start of the year.
RELATED LINKS Current DateTime: 05:14:53 21 Oct 2010 LinksList Documentid: 39731192 Fool Proofing Your Gold InvestmentEnjoy Gold Runup, But Beware at $1,355: ChartsCommodities Rally Still Strong, Gold Will Hit $2,000: Rogers Philip Klapwijk, chairman of GFMS, said: "In a currency war situation where there are beggar-thy-neighbor policies being put in place, gold stands out as an entirely neutral asset that's probably going to go up in price in such circumstances."
South Korea's central bank stressed any moves would have to be "cautious" and "prudent". One person who has advised the Bank of Korea on its gold holdings said it was "receptive to the idea" of buying gold, but added that there remained "differences of views" within the central bank.
Historically, Seoul has favored Treasury bills over commodities because they are more liquid and can be used as a weapon to control the notoriously volatile won. However, this reliance on the dollar has attracted widening criticism in recent years as commodity prices have soared.
Lee Ji-pyeong, senior researcher at the LG Economic Research Institute, said South Korea should have started building up gold stocks last year. Increasing its holdings now would be difficult but worthwhile, he said: "The bank is likely to remain hesitant, waiting for gold prices to come down, which is unlikely."
As one of the world's leading reserve holders and this year's president of the G20 leading economies, Seoul has advocated a system of global financial safety nets that might encourage many countries, South Korea included, to hold smaller reserves. Many economists are skeptical that this proposal, which is steered by the International Monetary Fund, could help reduce reserves, which they argue are at a level far beyond what is needed to defend against financial shocks.
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