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BOK sees W1.8tr loss on gold price plunge

July 26, 2015 - 17:22 By Chung Joo-won
By Chung Joo-won
South Korea’s central bank reported a 1.8 trillion won ($1.54 billion) loss as record-low international gold prices devalued its reserve, the parliamentary finance committee revealed Sunday.
According to the Bank of Korea’s report to the National Assembly’s Strategy and Finance Committee, the value of the bank’s gold purchased in 2011-2013 depreciated by 33 percent on average at current value.
Last week, the gold price plunged to its lowest level in five years since April 2010, plummeting gold futures and related financial derivatives after the faster-than-expected U.S. economic indices boosted expectations of a rate hike later this year.
As of 6 p.m. last Friday, the international gold price stood at $1,084.21 per troy ounce and 40,814.85 won per gram in the local market. This is almost half of the gold price in September 2011, when the metal appreciated to the $1,900 range. The gold price consistently slid since then.
Minor opposition Justice Party Rep. Park Won-suk, a member of the parliamentary finance committee, criticized the BOK for having bought the dollar-denominated metal at its peak price.
In 2011-2013, the BOK under then-Gov. Kim Choong-soo aggressively bought up gold, seeking to expand the country’s gold reserve for financial stability.
The BOK, now under incumbent Gov. Lee Ju-yeol, stood firm on the grounds that the gold reserve expansion was a necessary move in those days.
During the three-year period, the gold reserve jumped to 104.4 tons in 2013, up 90 tons from the 14.4 tons in August 2010. The BOK bought 40 tons in 2011, 30 tons in 2012 and 20 tons in 2013.
Yet criticisms about “expensive expansion” did not subside, especially when the gold price is expected to further fall on U.S. rate hike woes and the slowing gold demand of China, the world’s largest producer of the precious metal.
The U.S. rate hike is most likely to slash demand for gold, because the precious metal gives off zero interest profit, requires additional holding costs and its profitability only relies on price changes.
Last Friday, Federal Reserve Board Chair Janet Yellen told Congress that the Fed was on track to raise the interest rates later this year if the U.S. economy grows as expected.
According to the recent U.S. government data, June housing starts rebounded by more than 9.8 percent, in addition to the increasing inflation rate ― signaling favorable signs of economic recovery.
The expected U.S. economic recovery is also likely to lead to the appreciation of the greenback against a basket of foreign currencies. When the dollar is strong, the same amount of gold and other dollar-denominated commodities becomes more expensive to investors with foreign currencies.
Meanwhile, South Korean individual investors began hoarding gold ornaments and accessories or actively buying gold-related exchange traded funds on expectations that gold would rebound in the coming months.
Gmarket, the country’s largest online shopping site run by eBay Korea, said the monthly sales of gold bars and pure gold products from June 24 to July 23 grew 138 percent from a year earlier. Most popular gold products included gold bars, necklaces and bracelets, earrings, baby birthday rings and golden flowers.
“The international gold price fell as much as 7 percent in only 30 days, to a five-year low,” a Gmarket official said, estimating that the low-interest tide here would continue to fuel Korean households’ desire for gold as a “wise investment.”
During the same period, Auction, another major e-commerce site run by eBay Korea, reported a 20 percent hike in gold sales.