In a recent statement, the Bank of Korea (BOK) expressed its preference for maintaining dollar liquidity rather than increasing its gold holdings for foreign exchange reserves. The BOK’s Reserve Management Group highlighted the need for a cautious approach in determining the gold-to-reserves ratio, citing various factors influencing their decision.
Caution Amidst Global Economic Recession and Geopolitical Risks
The Bank of Korea (BOK) emphasized the importance of being prepared to provide ample liquidity in dollars, considering the possibility of a global economic recession and underlying geopolitical risks. In uncertain times, maintaining a sufficient dollar liquidity buffer allows the central bank to navigate potential financial challenges and stabilize the economy.
Uncertainty of Gold Prices and Difficulty in Liquidation
The Bank of Korea (BOK) also pointed out the uncertainty surrounding gold prices, which were nearing their latest peak. The volatility in gold prices makes it challenging for the central bank to accurately assess the long-term value and stability of gold as an asset. Furthermore, the difficulty in selling gold for liquidity purposes adds another layer of complexity to the decision-making process.
First Inspection of Gold Holdings
On May 23, the Bank of Korea (BOK) released its gold management policy alongside the results of its first inspection of gold holdings. The inspection, conducted at the Bank of England, where all of the BOK’s gold holdings are stored, concluded without major concerns, except for a few minor errors in refiner marks on three gold bars. The BOK stated that such errors were relatively common. While acknowledging London as the hub of the gold market, the BOK highlighted the importance of regular inspections and indicated a potential consideration of diversifying storage sites for safety purposes.
Current Gold Holdings and Reserves
As of the end of May, the Bank of Korea (BOK) held 104.4 tonnes of gold in its foreign exchange reserves, which amounts to approximately $4.8 billion. This gold allocation represents 1.14% of the BOK’s total reserves, which stand at $421 billion.
Conclusion:
The Bank of Korea’s recent statement reflects its cautious approach to managing its foreign exchange reserves. Given the potential for a global economic recession and geopolitical risks, the Bank of Korea (BOK) deems it more desirable to prioritize maintaining ample dollar liquidity rather than increasing its gold holdings. Factors such as the uncertainty of gold prices, difficulties in liquidation, and the need for regular inspections contribute to the BOK’s decision-making process. As the central bank continues to navigate evolving economic conditions and safeguard the country’s financial stability, it will closely monitor global developments and make adjustments to its reserve management strategies accordingly.
