SKorean central bank buys gold after long hiatus

[August 02, 2011]  SEOUL, South Korea (AP) -- South Korea's central bank has purchased gold for the first time since the Asian financial crisis more than a decade ago as it seeks to diversify the country's increasing pot of foreign reserve holdings.

The gold portion of South Korea's official foreign reserves surged to $1.32 billion at the end of July from $80 million at the end of June, the Bank of Korea said Tuesday.

The country's total foreign reserves, meanwhile, reached $311.03 billion at the end of July, an increase of $6.55 billion from the $304.48 billion in June, the bank said in a statement

The July total was a fresh record high after two months of declines. South Korea's foreign reserves have surged this year and have now hit all-time highs in five of the past seven months.

South Korea's reserves are largely invested in securities and deposits, according to the bank. A smaller component is a notional currency called Special Drawing Rights, which are overseen by the International Monetary Fund. Despite the big increase in gold holdings, the precious metal still accounts for the smallest portion of the reserves.

In a separate statement, the bank said that gold purchases in June and July amounted to 25 tons and brought total holdings to 39.4 tons. The purchases were reflected in July's official reserves, it said.

The BOK said that the increase in gold holdings makes sense given the growth in the country's total foreign reserve holdings and will be positive in improving the diversification of how the reserves are invested. The bank said it purchased gold as a long-term investment.

South Korea's foreign reserve holdings surged past $300 billion for the first time in April.

The price of gold has soared to record nominal highs as it has won favor with investors who see it as a safe investment amid uncertainties that have plagued the world economy following the 2008 global financial crisis and continuing worries over sovereign debt instability in Europe and the United States.

South Korea's central bank last bought gold in 1998 when the country suffered a massive foreign exchange crisis and was forced to seek an international financial bailout. The experience, part of broader economic turmoil in East Asia that struck Thailand and Indonesia as well, has left a deep emotional scar on South Korean policymakers and ordinary citizens.

Individual South Koreans donated gold to the government, which then sold it to earn badly needed foreign exchange. The BOK bought up what was not sold internationally, according to the bank.

The central bank attributed July's increase in the overall reserves mainly to the higher dollar value of the portion denominated in the Japanese yen and British pound in line with their strength against the greenback. The bank said that increased operating profits on the reserves also contributed to the gain.

Foreign reserves are a key economic and policy tool that countries can wield to defend their currency from speculative attack, provide liquidity and bolster the overall financial system. Asian countries and territories lead the world in reserve holdings.

South Korea's reserves remained the world's seventh largest behind those of China, Japan, Russia, Taiwan, Brazil and India as of the end of June, according to the central bank, which did not provide a global ranking for July. Seven of the top 10 holders of reserves as of the end of June were in Asia, according to the bank.

[Associated Press; By KELLY OLSEN]

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