US Dollars Preferable?
With a recent spike in gold prices, some experts have argued that the Bank of Korea (BOK) should increase its gold reserves. but the BOK believes that maintaining U.S. dollar liquidity is preferable.
According to a report on the status of the BOK’s gold reserves and the future direction of gold management released by the BOK’s Foreign Capital Management Center on June 6, the BOK’s gold reserves stood at 104.4 tons at the end of last year, ranking 38th out of 127 countries at market value in the World Gold Council. This was down by four notches from 34th place at the end of 2021. The BOK has not bought gold since 2013 and has been holding the same amount for 10 years.
At the end of 2022, gold accounted for just 1.1 percent of the BOK’s foreign currency assets. The U.S. dollar accounted for more than 70 percent, with the remainder made up of other currencies such as the euro, the Japanese yen, and the Chinese yuan.
While some experts have argued for an increase in gold holdings in the BOK’s foreign exchange reserves, the BOK advocates a cautious approach. Gold is not an asset where the proportion can be actively changed by reflecting market outlooks like other currencies, because gold has relatively low liquidity and is perceived as a last resort among foreign exchange reserves, which may send unexpected signals to the market if a market outlook changes, the BOK says.
“In 2022, foreign exchange reserves fell by US$40 billion according to measures to stabilize the Korean foreign exchange market,” said an official at the Foreign Capital Management Center. “With the possibility of a global recession and geopolitical risks, it is a better option to supply sufficient U.S. dollar liquidity rather than expanding gold holdings. Especially since the price of gold has been significantly coupled to the performances of U.S. government bonds since 2018, there is no big need to sell U.S. government securities currently held for U.S. dollar liquidity and buy gold.”
The official added that with the price of gold already near its previous high, the BOK should consider that it is not clear whether or not there will be enough energy to spare to push up the price. The U.S. dollar can rise at any time depending on changes in the global economy. Also, the real interest rate, the opportunity cost of holding gold, turned positive, which is a constraint against the rise of the price of gold, the official said.