South Korea hastens central bank gold-buying spree


Central banks aren't usually in the jewelry business, so they must think that it's ... money.

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By Yoo Choonsik and Rujun Shen
Friday, December 2, 2011

South Korea's central bank said on Friday it bought gold in November for the second time this year to diversify its foreign reserves, joining its counterparts in other countries in seeking protection against financial instability and inflation.

Central banks around the world, especially in emerging economies, have accelerated gold purchases in recent months, driving up the total official sector gold purchase in the third quarter by more than double to 148.4 tonnes, according to the World Gold Council.

"We bought the gold as part of our diversification strategy and based on long-term investment considerations," Lee Jung, an official at the bank's reserve management group, told reporters.

The Bank of Korea bought 15 tonnes of gold for $850 million in November, after buying 25 tonnes for $1.24 billion between June and July in its first gold purchase in more than a decade, bringing total gold ownership to 54.4 tonnes.

The central bank of Asia's fourth-largest economy still holds only a small proportion of its more than $300 billion reserves in gold, but gold now accounts for 0.7 percent of total reserves, up from just 0.026 percent in June.

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Lee declined to say if the Bank of Korea intended boost gold holdings but added its efforts to diversify away from dollars and securities was a long-term strategy.

Reuters calculations show the Bank of Korea paid about $1,750 per ounce on average for the purchase, compared with an average spot price of about $1,740 for the month.

Central banks in countries from Russia and Thailand to Mexico and Colombia have been boosting gold holdings as doubts grew about the stability of the U.S. dollar as the world's top reserve currency and with inflation expected to remain high.

"Emerging economies including Russia and China have been adding their gold reserves, as the situation in the United States and Europe is not looking great," said Hou Xinqiang, an analyst at Jinrui Futures in China.

"Growing appetite for gold from central banks will surely support gold prices to further rally in the next few years, and gold is gaining an increasingly prominent status on central banks' books."

Central banks became net gold buyers in 2010 for the first time in two decades and have remained net purchasers this year, even as spot gold prices have climbed more than 20 percent.

The total net purchase of the official sector in the first three quarters of the year stood at 348.7 tonnes, compared to last year's total of 77 tonnes, according to the World Gold Council.

"While the bulk of central bank gold is still held in North America and Europe, a build-up of gold reserves in emerging markets has been a consistent feature over the last few years," said the council in a research report published recently.

South Korea's foreign reserves including gold fell to $308.63 billion by the end of November from $310.98 billion a month before, due to declines in non-dollar currencies such as the euro, the Bank of Korea said.

It held 90.5 percent of its reserves in securities such as government bonds, it said.

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