The Bank of Korea's First Physical Gold Purchase Plan in 13 Years and Domestic Procurement Method

The Bank of Korea is moving to resume purchases of physical gold for the first time in 13 years since 2013. The key difference from the previous method of buying gold with dollars on the international gold market is the creation of a procurement channel through which the Bank can purchase in won gold produced by domestic refiners that was intended for export.

However, “the first purchase in 13 years” should be understood as referring to a policy direction and the establishment of a procurement system. The specific contract size and timing of purchases may be determined based on gold prices, foreign exchange reserve management plans, market liquidity, and consultations with suppliers.

How Much Gold Does the Bank of Korea Hold?

The Bank of Korea purchased a total of 90 tons of additional gold from 2011 to 2013 and has since maintained its holdings at 104.4 tons. Since country rankings by gold holdings and gold’s share of foreign exchange reserves vary depending on the reference date, gold prices, and calculation method, a particular ranking or percentage should not be interpreted as a fixed figure.

In particular, the following two figures must be distinguished.

• Holdings by weight: The physical weight of the gold held by the Bank of Korea. The figure of 104.4 tons falls into this category.
• Share by value: The percentage of the total market value of foreign exchange reserves accounted for by gold. If international gold prices and exchange rates rise, this share may increase even without additional purchases.

The book value and market value of gold, as well as the calculation standards used by international comparison organizations, may also differ. Therefore, any answer to the question “What percentage does gold account for?” must specify both the calculation date and the valuation standard.

Why the Bank of Korea Wants to Increase Its Gold Holdings Again

Diversification of Foreign Exchange Reserve Assets

Foreign exchange reserves are managed with consideration for liquidity, safety, and profitability rather than being concentrated solely in a particular currency or bonds. Because gold does not directly depend on a particular country’s promise to pay, it can complement a portfolio centered on currencies and government bonds.

Responding to Geopolitical and Sanctions Risks

In the event of conflicts between countries, financial sanctions, or disruptions to payment networks, the transfer or disposal of assets held by overseas financial institutions may be restricted. Gold that a central bank directly owns and controls is one means of preparing for such extreme circumstances.

However, accessibility and legal risks also vary depending on where and in what form gold is stored. Diversifying some gold held overseas into domestic infrastructure does not eliminate every risk, but it can reduce concentration in particular overseas storage facilities.

Rising Gold Demand from Central Banks Worldwide

In recent years, several central banks have been net purchasers of gold to diversify their foreign exchange reserves and manage geopolitical risks. However, purchases by other central banks do not automatically determine the appropriate level of holdings for the Bank of Korea. The Bank must consider the won exchange rate, foreign currency liquidity, the ability to sell assets, and gold price levels together.

A Structure for Buying Gold Domestically in Won

The proposed procurement plan involves the Bank of Korea, domestic nonferrous metal refiners, the Korea Exchange, and the Korea Securities Depository, among others. Refiners such as LS MnM and Korea Zinc recover gold as a byproduct while refining nonferrous metals such as copper and zinc.

The term “domestically produced gold” here does not necessarily mean gold mined in Korea. It may also include gold produced by refining imported ore or concentrate at domestic facilities, so it is more accurate to understand it as gold refined and produced domestically.

According to the materials presented, domestic refiners produce approximately 40–45 tons of gold annually, of which approximately 4–5 tons that are not consumed domestically and are scheduled for export are the initial subject of discussions. This does not mean that the Bank of Korea will purchase the entire annual output.

How Won-Denominated Purchases Reduce the Burden on the Foreign Exchange Market

When the Bank of Korea purchases gold on international markets, it generally must pay in a foreign currency such as the dollar. If the purchase is large or the foreign exchange market is unstable, this may create a burden for foreign currency liquidity management.

By contrast, paying domestic producers in won allows the Bank to acquire gold assets without immediately disposing of existing dollar assets. In particular, acquiring domestically volumes that were scheduled for export reduces the need to separately obtain dollars for gold purchases in the on-exchange won-dollar market.

However, won-denominated purchases do not eliminate the economic cost. Producers forgo the foreign currency they could have received by exporting the gold and instead receive won, while the Bank of Korea must pay a price reflecting international gold prices and exchange rates. From the perspective of the country as a whole, there is also an opportunity cost because the export revenue from the gold is not generated.

How Do Negotiated Over-the-Counter Block Trades Work?

If the Bank of Korea places a large purchase order in the same on-exchange order book used by ordinary investors, asking prices may rise rapidly and trigger follow-on buying. To reduce this effect, the Bank may negotiate the price, quantity, and settlement date with producers in advance and then conduct the transaction over the counter.

The general procedure can be described as follows.

1. A domestic producer presents the volume scheduled for export and its preferred transaction timing.
2. The Bank of Korea reviews its foreign exchange reserve management plan and domestic and international gold prices.
3. The two sides negotiate the quantity, pricing formula, quality standards, and settlement terms.
4. The transaction is completed after eligibility inspections and title transfer procedures.
5. The gold is allocated to designated domestic storage and depository infrastructure.

Over-the-counter transactions reduce the direct exposure of orders to on-exchange quotes, but they do not completely prevent domestic gold prices from rising. Once increased central bank demand becomes known, market expectations may change, and even volumes originally intended for export may affect the outlook for the future supply structure.

Why Volumes Scheduled for Export Are Purchased First

If the Bank of Korea absorbs large quantities of the domestically distributed gold used by ordinary investors or precious metal businesses, supply shortages and price distortions may occur. By contrast, acquiring volumes that were originally intended for export has a relatively limited direct effect on the existing supply in the domestic retail market.

This principle has three purposes.

• Protect the volume circulating in the domestic spot gold market.
• Limit the direct impact of the Bank of Korea’s purchase orders on on-exchange prices.
• Provide domestic refiners with a stable counterparty for large-volume transactions.

However, the criteria for determining whether gold is “scheduled for export,” the fairness of purchase prices, and the actual impact on domestic supply must be examined once the transaction system is specified in detail.

Advantages and Management Requirements of Domestic Storage

A substantial portion of the physical gold held by the Bank of Korea is known to have been stored through overseas infrastructure. Increasing the share stored domestically can help prepare for risks such as operational shutdowns at overseas storage facilities, restrictions on asset transfers, or sanctions between countries.

Domestic storage, however, requires the following conditions.

• Verification of purity and specifications recognized in international markets
• Recordkeeping for each gold bar, including serial numbers and weight
• Independent physical inspections and regular audits
• Security and insurance systems against theft, fire, and disasters
• Transportation and recertification procedures required for future sales on international markets

The mere fact that gold is located domestically does not guarantee liquidity. To use it promptly as collateral during a crisis or sell it on international markets, the gold bars must meet international standards and have clear ownership records.

Physical Gold and Gold ETFs Are Not the Same Asset

Reports that the Bank of Korea purchased a small amount of gold ETFs must be distinguished from the procurement of physical gold. Both assets are affected by gold prices, but their legal and accounting characteristics differ.

Under the International Monetary Fund’s balance of payments standards, “monetary gold” means gold owned by monetary authorities and held as a reserve asset. Shares in an ETF that tracks the price of gold provide price exposure but are not the same asset as physical monetary gold.

Key Indicators to Monitor Going Forward

To assess the Bank of Korea’s policy of expanding its gold holdings, actual operating data rather than announcement headlines must be examined.

• Annual physical gold purchases and cumulative holdings
• Average purchase price and price-setting criteria
• Changes in the amounts stored domestically and overseas
• Gold’s share of the total market value of foreign exchange reserves
• Differences between on-exchange and off-exchange gold prices and changes in domestic circulation volumes
• Quality certification, storage fees, and insurance costs
• Conditions for suspending or postponing purchases

The significance of this plan does not lie simply in buying more gold. The key is that it creates a new foreign exchange reserve management channel through which the Bank can acquire domestically produced gold in won without immediately disposing of dollar assets while diversifying storage locations and asset types. However, because over-the-counter purchases do not completely eliminate price and supply effects, transparent ex post disclosure of transaction volumes and pricing formulas is important.