Explained: Why South Korea bought gold after 13 years and what it means for yellow metal investors?

Gold has witnessed one of its most volatile starts to a year in recent years. The precious metal surged to record highs in January, climbing past $5,500 per ounce, before tumbling to $4,100 per ounce by August. The sharp correction came as renewed tensions over the Iran war sent oil prices soaring, fuelling expectations that the US Federal Reserve could raise interest rates later this year.

Despite the pullback, gold remains up about 20% for the year, even though it now trades about 25% below its January peak. A key factor that has helped prevent a deeper slide in gold prices is the steady pace of central bank buying.

According to the World Gold Council, central banks purchased 288.9 tonnes of gold in the second quarter, a 62% increase from a year earlier. South Korea has now joined that list, with its central bank returning to the gold market after 13 years, reinforcing the trend of sustained official sector demand.


South Korea's latest gold purchase marks a return to the market after a long hiatus that began with one of its most criticised investment decisions.

The country's central bank last bought gold between 2011 and 2013, acquiring 90 tonnes at an average price of $1,629 an ounce for a total investment of about $4.7 billion, according to figures from Korea Economic Daily.

The timing appeared disastrous. Gold, which had peaked at $1,920.30 an ounce in September 2011, tumbled to $1,180.71 by June 2013, a decline of 38.5%. It was gold's worst annual performance since 1981.

At the trough, the value of South Korea's holdings had fallen 27.5% below the purchase cost. The losses sparked political scrutiny, with lawmakers questioning then Bank of Korea Governor Kim Choong-soo. By 2015, the unrealised loss had widened to about 1.8 trillion won, prompting the central bank to halt further gold purchases.

More than a decade later, that decision looks very different. Those same 90 tonnes are now worth roughly $11.8 billion, around $7 billion more than what South Korea originally paid.

Start of a big gold rally?

According to Jefferies’ Global Head of Equity Strategy Christopher Wood and billionaire hedge fund manager John Paulson, the recent pullback could offer investors an opportunity to gradually start accumulating gold. Both suggest that the precious metal may be at the beginning of a long-term bull run.

"As people lose faith in paper currencies, gold as an alternative will continue to grow," Paulson said in an interview with CNBC. Paulson, whose bet against subprime mortgages became one of the most profitable trades in Wall Street history, turned his attention to gold in 2009.

He argued that fiscal and monetary stimulus following the financial crisis would eventually weaken the US dollar. Since then, gold prices have roughly quadrupled, crossing the $5,000 threshold before pulling back.

Paulson said demand for bullion is continuing to broaden, led by central banks adding to their reserves alongside rising interest from the private sector. "Gold is becoming the most apt reserve currency in the world, replacing fiat currencies," Paulson said in an interview with CNBC. "The demand from central banks, for instance, has continued to grow, as has the private sector."

However, Paulson believes investors could benefit more from owning gold mining companies than bullion itself, particularly companies with large undeveloped reserves. "I think the greatest way to invest is to invest in early-stage gold stocks," he said.

Christopher Wood, in his Greed and Fear report said investors should once again begin accumulating gold and gold mining stocks after an extended pause.

He draws a parallel with the dot-com bust, arguing that when the Nasdaq-led technology sector drove the market lower, the bear market had by late 2000 spread beyond technology to other sectors as it became clear that the unwinding of the dot-com boom would affect the broader economy.

Wood believes a similar scenario could unfold if the AI capex boom implodes, which he says would happen if credit issues come to the fore. This comes despite the broadening of the US equity market since the AI capex boom and the related increase in wealth effect in the US stock market, which have been among the main drivers of US economic growth over the past three years, along with easy fiscal policy.

The World Gold Council echoes this view. At current levels, gold prices are broadly aligned with a global backdrop of moderate growth, cooling but still elevated inflation, and expectations of further, but limited, central bank tightening. Under these conditions, gold is likely to remain relatively rangebound, within a range of ±5%.

However, the stage could be set for a possible breakout. On the upside, clear catalysts such as a worsening economy, a renewed geopolitical shock, a shift towards lower interest-rate expectations or a wave of dip buying could reignite gold's momentum and push prices back towards US$4,500/oz or above. If the signals are strong, gold could move even higher.

Risks to the gold rally

On the other hand, resilient economic growth, rising yields and calmer markets could put further pressure on gold. Even so, a decline of more than 10% from current levels could be limited by bargain-hunting demand.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)