Central bank has big loss from gold investment

By Choi Sung-jin

The Bank of Korea (BOK), the nation’s central bank and chief monetary policymaker, is supposed to make the most correct forecasts for the domestic and global economy.

But the central bank has come under fire because of huge losses it has sustained by investing in gold, economic watchers said Wednesday.

The BOK holds 104.4 tons of gold, some 90 percent of which was bought between July 2011 and February 2013 when international prices rose way above $1,500 per troy ounce, they said.

The average purchase price during the period was $1,628 an ounce. Given the current price is hovering around $1,091, the rate of return on investment has fallen to -33 percent in just three to four years, they said. In other words, the central bank has lost 1.88 trillion won ($1.54 billion) by buying 90 tons of gold.

As international gold prices show little sign of rebound, the controversy is growing over the central bank putting a dent in national wealth. Critics say the bank can suffer an investment loss but the BOK shows little intention of recovering it. “This seems to be the time for additional purchases, now that gold prices remain low,” a market watcher said.

But BOK officials seem to be in a dilemma, because gold prices are unlikely to rise anytime soon, as long as the U.S. dollar maintains its strength, analysts said.

“A bigger problem is the central bankers’ inaction and their time-serving attitudes,” a critic said. Starting in 2010, then BOK Governor Kim Choong-soo began to buy gold, in part pressured by politicians and in part by predictions that the gold price would exceed $2,000 an ounce, as a means of diversifying foreign reserve holdings. The BOK reportedly wanted to hold more gold at the time but had to stop buying in the face of the consequent downturn of price.

Since Kim’s successor Lee Ju-yeol took office in 2014, few within the BOK have talked about the gold investment, with those deeply involved in the purchase three to four years ago sent to the central bank’s provincial branches, they said.

The critics said the BOK seems to have no strategy of its own, while busying itself to avoid responsibility. Actually, some emerging economies, like China and Russia, bought lots of gold last year when prices seemed to hit the bottom. At a parliamentary inspection last year, a ruling party lawmaker also asked why the central bank was not buying gold according to its original purpose of investment.

The BOK has reiterated its position that the gold purchase is a long-term, strategic investment and it is meaningless to discuss the matter based on short-term price movements.

Experts seem to view it differently, however. “There can be varying views on the optimal level of gold possession, but it is problematic there is so wide a gap between the nation’s foreign reserves (the sixth largest in the world) and its gold holdings (34th largest),” said Lee Phil-sang, an adjunct professor at Seoul National University. “It is also not normal that the BOK refuses to explain why it bought gold some years ago and why it is not buying now.”

Other experts also noted now is the time for the central bank to come up with a basic policy and standards related to gold investment, and study timings for buying and selling according to such policy and criteria.