Will BOK raise gold holdings?

By Kim Da-ye

Will the Bank of Korea (BOK) raise its gold holdings as the precious metal’s price hits record highs and is considered the new safe asset amid uncertainty?

Gold for June delivery rose $14.1 Thursday to settle at $1,531.2 an ounce (28.3 grams) after reaching $1,538.8 during trading hours.

It had jumped $13.6 to $1,517.1 the previous day at the New York Mercantile Exchange (NYMEX), a commodity futures exchange. The Thursday closing price represents an 8.6 percent profit from Feb. 28.

The recent growth was largely due to the U.S. Federal Reserve’s announcement that there won’t be another liquidity injection after the second phase of quantitative easing ends in June. The U.S. government has been buying Treasury bonds worth $600 billion when the near-zero interest rate was insufficient to boost the economy.

A BOK official said the central bank is closely monitoring the gold price, but isn’t likely to pad the portion of gold in its foreign exchange reserves significantly.

“Korea traditionally has a high demand for U.S. dollars. If we raise the portion of gold, it decreases the amount of dollars in the reserves,” he said.

Dollars are held in forms of bonds, stocks or deposits which pay interest, yields or dividends unless their issuers go bankrupt.

Gold, in comparison, pays none of that, but its value fluctuates, benefiting those who bought it at a lower price when it increases.

As of March, the central bank had foreign exchange reserves of $293.6 billion, more than 60 percent of which consists of U.S. dollars. Euros, British pounds, Japanese yen, Australian dollars and Canadian dollars account for some 35 percent.

In comparison, the bank held $79.6 million in gold ― 0.027 percent of the reserves.

The official said that, in contrast to its reputation as a safe asset, gold is, in fact, volatile in the long-term. He added that it was a philosophical question if a central bank should invest in it.

“Some foreign governments such as China, India and Russia are raising their holdings of gold, but the situation is different for us. Korea hasn’t had gold in its reserves in her history,” he said.

He said that the argument for more gold in the reserves isn’t new as the precious metal has been making gains since 2005.

Much gold is held by European central banks in a tight grip, reducing the circulation. In the past the introduction of financial instruments such as exchange-traded funds linked to gold in the mid-2000s allowed retail investors to buy it easily, triggering the demand to shoot up.

Samsung Securities analyst Lim Byoung-hyo said that the price of gold is likely to rise until the end of the year because people have lost faith in the U.S. dollar.

Lim said that investors buy dollars for two reasons. Some bet on the rising value against other currencies, but it is losing its allure to other emerging economies’ currencies such as the Chinese yuan, which is under pressure to appreciate.

S&P’s downgrade on the outlook for the U.S. has also damaged the status of the currency in the mid- to long-term, Lim said.

Others would be interested in depositing the dollars and earning interest. The U.S., however, has kept the interest rate at a record low level, and is seeking a slow, gradual exit strategy.

Lim said that the Fed is likely to raise the key rate after the first quarter of 2012 when employment and consumption revive and inflationary pressure increases. By then, the preference for gold as an alternative to dollars could weaken.