Bank of Korea Shifts to Gold ETF Investment After 13-Year Hiatus

The Bank of Korea (BOK) is expected to invest in overseas-listed physical gold exchange-traded funds (ETFs) starting this year. This marks the central bank's first purchase of gold-related financial products in 13 years since 2013. The decision is interpreted as a risk hedging measure amid growing preference for safe-haven assets following recent financial market volatility.

According to investment banking industry sources on Wednesday, the BOK's Reserve Management Group plans to include overseas-listed physical gold ETFs in its portfolio from the first quarter of this year. While the central bank has traditionally managed assets centered on global developed market equity indices, the inclusion of gold is expected to enable portfolio diversification and improve medium to long-term returns.

The expansion of gold purchases by global central banks also appears to have influenced this decision. Since 2022, annual gold purchases by central banks worldwide have exceeded 1,000 tons, roughly double the average level from 2016 to 2021.

The BOK had previously determined that gold has lower liquidity and convertibility compared to other assets such as bonds and stocks, and lacks cash flows from interest or dividends, making it less efficient for asset management. All physical gold currently held is stored overseas, and income from lending is largely offset by storage costs.

In contrast, physical gold ETFs track the price of physical gold while being immediately tradable in the market, offering high liquidity and no storage cost burden. The assessment is that they align with foreign exchange reserve management principles as they can be quickly converted to cash during periods of heightened foreign exchange market volatility.

Some view it as a rational decision to indirectly and diversely invest in gold, which has shown a clear upward trend, given that safe assets alone cannot generate sufficient returns when utilizing funds for U.S. investment in the future.

A BOK official said regarding the resumption of gold purchases, "It is true that we are currently reviewing the purchase of gold ETFs, but specific operational plans have not been finalized."

The reason the BOK did not purchase even a single gram of gold over the past 13 years lies in the trauma from suffering massive losses after increasing gold investments in the early 2010s. Until 2010 under former Governor Lee Seong-tae, the BOK barely touched gold. The former governor reportedly held the view that investing in gold with its high price volatility was inappropriate. However, the situation changed when his successor, former Governor Kim Choong-soo, took office. From 2011 to early 2013, Governor Kim invested approximately 3.5 trillion won over three years to intensively purchase 90 tons of gold.

The problem was that gold prices plummeted starting in 2013. As market anxiety from the European debt crisis subsided, the value of gold as a safe-haven asset dropped sharply. Following criticism during parliamentary audits that "the BOK lost one-third of its investment," the central bank completely withdrew from gold investment. The gold purchased at that time is stored in the form of gold bars in the Bank of England's underground vault.

The BOK, which seemed unlikely to ever buy gold again, has returned to gold-related investment based on the assessment that gold prices are likely to continue rising. Recently, gold prices have been hitting record highs daily as confidence in dollar assets has declined due to geopolitical crises and threats to the Federal Reserve's independence. Forecasts suggest that "Sell America" could become reality as major countries have declared intentions to sell U.S. Treasury bonds. Accordingly, the BOK decided to buy gold now, expecting steady demand for gold from governments and central banks worldwide going forward.

According to the New York Mercantile Exchange (COMEX) on Wednesday, gold futures prices rose 3.31% from the previous trading day to $5,250.6 per troy ounce during trading, recording an all-time high. Major investment banks including Société Générale ($6,000) and Morgan Stanley ($5,700) are frequently raising their gold price forecasts for the year.

If the World Gold Council (WGC) proceeds with issuing "digital gold," the foundation for gold demand could expand further. Observations suggest that digitizing gold would make it easier to use in various transactions and payments, and would increase its value as collateral, potentially driving gold prices even higher. A BOK official assessed, "Despite recent gold price increases, many central banks still view the gold market positively."

Analysis suggests the BOK chose overseas-listed physical gold ETFs as an alternative to overcome the disadvantages of physical gold investment. This is because physical gold has lower liquidity and convertibility compared to other assets such as government bonds. In particular, gold is perceived as a last resort among foreign exchange reserves, creating a limitation where once purchased, it cannot be easily sold.

In contrast, physical gold ETFs can be traded in the market at any time without holding physical gold, allowing easy conversion to cash. Transaction details are also not disclosed immediately. While both physical gold and ETFs share characteristics of having no cash flows from interest or dividends and high price volatility, the decision to purchase gold appears to have been made for portfolio diversification purposes.

The product most likely to be invested in is SPDR Gold Trust (GLD), the world's largest physical gold ETF, with assets under management of approximately $172.75 billion (about 246 trillion won). In contrast, domestic products such as "ACE KRX Gold" and "TIGER KRX Gold" have combined net assets of 6.2 trillion won, which is relatively small. Direct investment by the BOK could trigger a "kimchi premium" where domestic prices become higher than international prices, making them unsuitable.

While the BOK suspended gold purchases for 13 years, central banks of major countries including China actively accumulated gold assets. The BOK's gold holdings stand at 104.4 tons, ranking 39th among central banks worldwide. Gold's share of total foreign exchange reserves has fallen to 3.2%, ranking 98th among 100 surveyed countries. Since some countries including China purchase gold unofficially, questions have been raised about whether the WGC's central bank gold holding statistics may be underestimated.

After halting gold purchases in 2013, the BOK steadily increased returns by diversifying its foreign currency asset management portfolio focusing on stocks. The stock portion of foreign currency assets was 5.7% in 2012 but expanded to around 10% by 2024. This is approximately five times higher than the average stock allocation (about 2%) among 136 central banks worldwide. While the BOK's foreign asset allocation is not disclosed, it is known to have significantly diversified investments in the S&P 500 and Morgan Stanley Capital International (MSCI) indices.

From the end of 2012 to Wednesday, the S&P 500's cumulative return was 478% and the MSCI index was 328%, significantly exceeding gold's cumulative return of 209%. Based on this, analysis suggests the BOK has devised a strategy to secure both profitability and operational capacity in its gold ETF investment.

An official from a state-run research institute said, "Previously, the primary objectives of the BOK's foreign asset management were securing safety, liquidity, and convertibility," adding, "However, as $20 billion for U.S. investment will be drawn from foreign asset management returns going forward, the BOK appears to have turned its attention to gold investment."