S Korea gold buy shows strong official appetite

SINGAPORE Tue Aug 2, 2011 2:39pm IST

A man holds a gold bar at the national bank headquarters in Warsaw June 17, 2011. REUTERS/Kacper Pempel/Files

A man holds a gold bar at the national bank headquarters in Warsaw June 17, 2011.

Credit: Reuters/Kacper Pempel/Files

Related Topics

SINGAPORE (Reuters) - South Korea's first gold purchase since the Asian financial crisis shows that the official appetite for gold remains intact in the face of record prices, as a shaky global economic recovery, sovereign debt issues and high inflation drive diversification.

South Korea may be followed by other central banks in the region as worries about U.S. debt payments and euro zone sovereign default dent the appeal of the world's top two currencies for holders of trillions of dollars in foreign exchange reserves.

The Bank of Korea bought 25 tonnes of gold worth $1.24 billion in the last two months, increasing its holdings to 39.4 tonnes, still well below other Asian countries such as China, India and Japan.

It follows in the footsteps of India and China, which made major purchases in 2009, and most recently Thailand.

Despite the purchases, gold still makes up only a tiny fraction of reserves for most of these fast-growing Asian economies -- as little as 1.6 percent in the case of China.

"As the foreign exchange reserves of emerging economies increase with rapid economic growth, the proportion of gold in their portfolio is correspondingly reduced," said Ong Yi Ling, investment analyst at Phillip Futures.

"Central banks have become more friendly towards gold after the financial crisis. Western central banks now have a reduced appetite for gold sales. In 2010, the official sector became a net buyer of gold for the first time in 21 years."

Earlier this year, Thailand, whose gold holdings account for only 2.9 percent of reserves, bought 9.3 tonnes of gold. Russia purchased 41.8 tonnes and Mexico bought 99.2 tonnes before selling some, according to the World Gold Council.

China is the world's sixth largest gold holder and the biggest among Asian banks with 1,054.1 tonnes, equivalent to 1.6 percent of its reserves.

The Bank of Korea said gold looked less lucrative as an investment as it hovers near all time highs, but it was the right time to buy the precious metal because its foreign reserves had risen above $300 billion.

Cash gold was little moved after South Korea's announcement of the purchase, but held near a record around $1,632 an ounce hit last week.

"I believe the concept that gold continues to be viewed as a safe haven asset, and a vehicle to diversify portfolios by large central banks speaks volumes," said David Meger, director of metals trading at Vision Financial Markets.

"Given the dark cloud of European and domestic debt issues, sagging economic activity, weak unemployment, and the threat of potential credit downgrades, we continue to believe that gold will be fundamentally supported for years to come."

An 11th hour deal to raise the U.S. debt ceiling cleared its biggest hurdle in the House of Representatives and staved off the prospect of a calamitous default, but it failed to allay fears Washington could still lose its triple-A credit rating.

The U.S. dollar tumbled to a record low around 0.7730 against the safe-haven Swiss franc on Monday, while the euro was at 1.1173 francs , not far off a record low near 1.1025.

"As the U.S. has printed lots of cash and may print more, the only way to protect value is to buy commodities to hedge against inflation," said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

The United States' debt woes still threaten the global economy despite the last-minute deal struck by the White House and political party leaders, China's main official newspaper said on Tuesday.

Beijing, the largest creditor to the United States, has repeatedly urged Washington to protect its dollar investments, estimated to account for about 70 percent of its $3.2 trillion in foreign exchange reserves, the world's largest.

CHINA NEXT?

Will China be another big buyer again, having made a major purchase in 2009?

"With gold representing only about 2 percent of its foreign exchange reserves, some are speculating that China may acquire more gold from their domestic mines in the future," said Ong of Phillip Futures.

"However, the size of the gold market is still extremely small compared to the FX market. Gold cannot be a main channel for the investing of foreign exchange reserves."

(Additional reporting by Frank Tang in NEW YORK)

FILED UNDER:

Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage