The BOK’s golden ticket

The Bank of Korea has just announced that it purchased 25 tons of gold on the international market in June and July by pulling $1.24 billion from foreign reserves. That news leaves us with a bitter aftertaste, not only due to its timing but because it raises questions about the rationale behind the purchase.

When Grand National Party lawmaker Lee Hye-hoon criticized the central bank for its laid-back attitude on securing gold during the National Assembly’s regular audit of the government in 2009, the presiding BOK governor rejected the idea of purchasing gold for two reasons: gold does not yield interest and U.S. Treasury bonds guarantee more profits than gold. That was when the gold price was at $1,000 per ounce. Nevertheless, the BOK purchased a considerable amount of gold for a whopping $1,600 per ounce.

The People’s Bank of China, meanwhile, has been collecting gold since 2003 in an attempt to internationalize the country’s currency as well as diversify its investments in the global market. That was when gold prices had plunged as low as $325 per ounce. China’s gold reserves, which stood at 600 tons at the time, grew to more than 1,000 tons in just six years. Yet the Chinese government says it will raise its gold reserves to 5,000 tons - commensurate with its economic stature and the continuing devaluation of the U.S. dollar - to become the world’s second largest holder of gold after the United States.

The BOK said that it decided on the gold purchase “because our foreign reserves are now over $300 billion and our domestic foreign exchange market is stable.” That’s a sharp contrast to its stubborn attitude last year when a multitude of research institutes urged it to buy gold. Even the Board of Audit and Inspection pressured it to increase its investments in gold and yuan last November. Now we wonder if the BOK purchased the gold to head off an expected political backlash ahead of parliamentary inspection sessions scheduled for September.

Nobody can be sure that the BOK’s latest gold purchase will be successful. But the government must possess an optimum level of gold - particularly when the U.S. dollar continues to weaken because of Washington’s quantitative easing and when our foreign reserves have grown considerably. It does not make sense to try to find fault with the direction the BOK is headed. But the bank should at least give us a reasonable explanation for purchasing gold with our hard-earned foreign reserves. Otherwise, it cannot avoid criticism that it is not as good as China’s central bank.