BOK Poised to Expand its Gold Holdings

From the FT:

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. With just 14 tonnes of gold – or 0.2 per cent of its $290bn reserves – Seoul is one of the smallest holders of gold among large economies. The world average is 10 per cent, according to the World Gold Council, while countries such as the US, 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 US will drive the value of the dollar lower. South Korea holds 63 per cent 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 per cent since the start of the year.

Historically, Seoul has favoured 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.

http://www.ft.com/cms/s/0/74576bd6-da90-11df-81b0-00144feabdhtml