Bank of Korea Plans First Domestic Gold Purchase in 13 Years

The Bank of Korea (BOK) said Monday it plans to purchase domestically produced gold for the first time in 13 years through over-the-counter transactions.

The BOK said it has established a partnership with LS MnM Co., a copper smelting and refining company, the Korea Exchange (KRX) and the Korea Securities Depository (KSD).

LS MnM is one of South Korea's two major gold producers, along with Korea Zinc Co., producing gold as a byproduct of copper, brass and zinc smelting.

The two companies produce approximately 40 to 45 tons of gold annually and export about 10 percent of that amount, according to the BOK.

The central bank said it will consider purchasing, upon request from the companies, a portion of the gold that is not consumed domestically and is intended for export, using the KRX's existing trading and settlement infrastructure and storage facilities currently being prepared by the KSD.

When the companies submit details, including the volume available for sale and their preferred timing, the BOK will determine whether to proceed with the transaction after comprehensively considering domestic and international gold prices, its gold management plans and market conditions.

The purchases will be made through large over-the-counter block transactions after prior consultations with the companies on price and quantity in order to minimize the impact on domestic gold prices, the BOK said.

The central bank said the new purchase channel can reduce foreign exchange risks compared with its previous gold purchases in overseas markets, which were paid for in U.S. dollars.

"The exact timing of the purchase will be determined after considering the preparation of the gold transaction infrastructure, the producers' export schedules and our plans for gold holdings," the BOK said.

Separately, the BOK said it purchased a small amount of gold-based exchange-traded funds (ETFs) sometime in the second quarter.

The moves marked the BOK's first gold purchases in 13 years.

According to the World Gold Council, the BOK held 104.4 tons of gold as of July, ranking 39th among central banks worldwide, excluding the International Monetary Fund (IMF) and the European Central Bank (ECB).

The BOK has kept its gold holdings unchanged at 104.4 tons since purchasing 20 tons in 2013, 30 tons in 2012 and 40 tons in 2011.

"Interest in safe-haven assets, such as gold, has increased significantly due to the recent escalation of geopolitical risks," a BOK official said. "Compared with other countries, gold accounts for a relatively small share of our foreign exchange reserves, and the recent decline in gold prices has reduced the burden of purchasing it."

According to separate BOK data, South Korea's foreign reserves stood at US$427.36 billion as of end-June, including $4.79 billion of gold bullion, accounting for 1.1 percent of the total.