Gold prices down nearly 30% from peak — Bank of Korea resumes buying for first time in 13 years

The Bank of Korea's decision to resume physical gold purchases for the first time in 13 years has drawn attention to the reasoning behind the move and where gold prices may be headed. Markets have interpreted the decision as a strategic step to diversify foreign reserves rather than a bet on short-term price gains, while retail investors are asking whether now is a good time to buy.

The central bank announced Monday that it would buy domestically produced gold — its first physical gold purchase since 2013. The bank plans to acquire gold produced as a byproduct of copper and zinc smelting by LS MnM and Korea Zinc, purchasing a portion of their export-bound supply at international market prices in won.

The Bank of Korea last bought physical gold in 2013, having purchased 40 tonnes in 2011, 30 tonnes in 2012 and 20 tonnes in 2013 — 90 tonnes in total. When international gold prices subsequently plunged, the bank faced criticism for buying near the peak. It halted additional purchases for 13 years, leaving its current holdings at 104.4 tonnes.

Analysts say the decision reflects a broader race among central banks worldwide to secure gold. As geopolitical risks persist and countries seek to reduce their dependence on the dollar, central banks have been raising gold's share of their foreign reserves.

Poland has added more than 30 tonnes this year alone, and China has been consistently expanding its holdings. South Korea, by contrast, holds gold equivalent to about 3.5 percent of its foreign reserves — ranking in the 40s globally by World Gold Council standards, less than Japan (846 tonnes) and even Taiwan.

The Bank of Korea expanded its gold-related asset strategy in the second quarter by adding overseas-listed gold spot ETFs to its portfolio for the first time, and has now moved to resume physical gold purchases as well.

Still, analysts caution against reading the decision as a signal that the Bank of Korea has identified a price floor. The central bank said it is not targeting any specific price level, but rather pursuing long-term diversification of its reserve assets, and that it plans to buy gradually while monitoring market conditions.

The price burden is somewhat lower than in the past. International gold prices hit a record high earlier this year before pulling back, falling nearly 30 percent from that peak. Prices have since partially recovered after the Federal Reserve held its benchmark interest rate steady, but remain well below the highs.

Domestic gold prices have also retreated from their early-year levels. Gold traded on the Korea Exchange gold market and retail pure-gold prices have both fallen considerably from their peaks, easing the cost of entry for investors.

The key variables for gold prices going forward are expected to be US monetary policy and central bank buying. The World Gold Council has said prices are likely to trade in a range for now in the second half of the year, but that there is room for further gains if geopolitical tensions escalate. Analysts also note that gold could face additional downward pressure if the US economy proves stronger than expected and the prospect of rate hikes returns.

Markets are watching whether sustained central bank buying will put a floor under prices. Global central banks' net purchases totaled 289 tonnes in the second quarter, a significant increase from the first quarter, according to the World Gold Council. With the Bank of Korea now joining the buying trend, analysts say the medium- to long-term demand base for gold could strengthen further.

Advisers note, however, that retail investors should approach gold differently from central banks. Physical gold such as gold bars carries a 10 percent value-added tax and various fees at purchase, making the spread between buying and selling prices relatively wide. Because that structure is inherently unfavorable for short-term trading, investors are advised to carefully consider their objectives and intended holding period.

Experts say that when deciding whether to invest in gold, investors should look beyond the Bank of Korea's purchases and consider US inflation and interest rate trends, the value of the dollar, and the broader gold-buying stance of global central banks. They emphasize that gold functions primarily as a safe-haven asset for diversifying a portfolio in volatile markets rather than a vehicle for short-term returns, and that investors should determine their allocation carefully within the context of their overall assets.