Bank of Korea sees `illusion` in gold, no cash return

The Bank of Korea, diversifying foreign-exchange reserves away from a falling dollar, said that additional gold holdings aren`t attractive as most other central banks aren`t buying and the metal offers no cash returns.

"There`s an illusion in gold," Lee Eung-baek, head of the bank`s reserve-management department, said in an interview. "We follow the big trend. Gold isn`t the trend. Out of more than 200 nations, how many countries have bought bullion?"

Gold surged to a record this month after central banks including India added more of the metal to reserves, while funds and individuals boosted purchases to protect their wealth against the weaker dollar and potential increase in inflation.

"Holding gold as part of reserves makes sense in terms of diversification, but I don`t think many central banks want to balloon their holdings with it," said Jerry Yoshikoshi, a senior economist with Sumitomo Mitsui Banking Corp.



Gold for immediate delivery, on course for a ninth annual gain, touched an all-time high of $1,226.56 an ounce on Dec. 3, and has gained 32 percent this year as the dollar has dropped 6.9 percent against a basket of six currencies.



Korea`s reserves -- the world`s sixth-largest after China, Japan, Russia, Taiwan and India -- rose to a record $270.9 billion in November as the central bank intervened in the foreign-exchange market. Central banks intervene by arranging purchases or sales of foreign exchange.

"Like other central banks, we have been increasing the types of currencies consisting of the reserves outside the dollar," Lee said by phone, without identifying the currencies. Gold "offers little value, with ?o cash returns," he said.

The Asian nation holds 14.4 metric tons of gold, equivalent to 0.03 percent of total reserves, according to figures from the Bank of Korea. That compares with the average of 10.2 percent held by central banks worldwide, according to data from INTL Commodities DMCC in October.

The dollar has weakened this year as the Federal Reserve kept benchmark interest rates near zero percent since December 2008 to revive lending after the worst financial crisis since World War II. Record U.S. government borrowing has also driven investor concern that the currency may be debased.

"Since India and Russia with large reserves bought gold, there`s speculation that Korea might buy it too," Lee said. "But we are not classified in the same category. There`s a slim chance that we will buy gold" from the IMF, he said.

Since the end of September, India, Mauritius and Sri Lanka bought more than half of the 403.3 tons of gold that the International Monetary Fund plans to sell to bolster its balance sheet. Bank Rossii, Russia`s central bank, also increased its gold holdings by 2.6 percent in October.

"The volatility on gold is too big," Lee said. "And once gold is purchased, it`s just kept in a safe and is not put up for sale even if prices rise."

Many central banks "remember bullion`s ultra-bearish trend in the nineties," Sumitomo Mitsui`s Yoshikoshi said. Gold tumbled as low as $251.95 an ounce during the decade, in August 1999. "The recent rally is, for me, too much in an environment where aggravated inflation is hardly expected in the coming years," he said.

Korea has reduced its holdings of Treasuries to $38.8 billion at the end of September from as high as $72.8 billion in February 2006, according to U.S. Department of Treasury data. This year, its holdings climbed $7.5 billion as the nation`s reserves increased.(Bloomberg)