South Korea spent more than a billion dollars in its first gold purchase in more than a decade, as uncertainty about global growth and sovereign debt push central banks around the world to diversify foreign reserves.
A brittle global economic recovery and precarious debt conditions in the United States and Europe have boosted the safe-haven appeal of gold, lifting bullion to a record high on Friday.
The Bank of Korea said in a statement on Tuesday it bought 25 tonnes of gold over the past two months, raising its gold holding to 39.4 tonnes, news that helped lift spot gold by around $6 from late Monday.
Reserve currencies, like the dollar and euro, have been losing their clout since the recent global financial crisis partly due to abnormal monetary policy adopted in many countries and fiscal deficit problems, said an official at the central bank who declined to be named because he was not authorized to speak to the media.
Data on 27 major economies from the Bank for International Settlements shows the dollar's inflation-adjusted real effective value has dropped by 10 percent in the past two years and the euro has lost 6 percent, reflecting the sharp increase in the amount of each currency in circulation.
South Korea's gold holdings remain far smaller than that of other Asian central banks, with China, which ranks sixth globally, the biggest with 1,054.1 tonnes by the end of May, according to World Gold Council data.
Japan, No. 9 globally, has 765.2 tonnes of gold, or 3.3 percent of its total reserves, and 11th-ranked India has 557.7 tonnes, or 8.7 percent.
South Korea's central bank seems a little late to the party, but gold investors should continue to expect price support as central bankers around the world are underinvested in the yellow stuff, said Sean McGillivray, head of asset allocation at Great Pacific Wealth Management.
Investors and central bankers are looking to protect purchasing power, diversifying into the currency of last resort, gold.
With prices hovering near historic highs, the central bank of Asia's fourth-largest economy said gold looked less lucrative as an investment, but it was the right time to buy the precious metal because its foreign reserves had risen above $300 billion.
The news helped boost gold prices, with spot up 0.4 percent at $1,623.94 an ounce by 0528 GMT. Gold hit a record high of $1,632.30 on Friday.
Any news about central banks buying gold reassures consumers and other major players who are already looking at gold as an investment, said Jeffrey Pritchard, analyst at California-based commodities futures and options brokerage Altavest Worldwide Trading.
CONDITIONS RIPE FOR GOLD PURCHASE The Bank of Korea said its latest gold purchase was valued at $1.24 billion. It did not say whether it had bought gold bullion or funds, or whether it plans to buy more gold.
The purchase comes weeks before the central bank is due to face an annual parliamentary audit, expected in September, and after several South Korean lawmakers from both the ruling and opposition parties have repeatedly called for it to boost holdings of gold to diversify reserves.
At 25 tonnes of gold, equivalent to 803,769 ounces, the average price paid comes to around $1,543 an ounce, based on Reuters calculations.
A BoK official said it was the bank's first gold purchase since at least the 1997-1998 Asian financial crisis when patriotic Koreans collected the precious metal as part of a campaign to boost the country's foreign reserves, when it was on the verge of a sovereign default.
The country had too small an amount of foreign reserves to diversify into gold before 2004 and was not able to buy gold between 2005 and 2007 due to concerns about the central bank's annual losses, the Bank of Korea said.
Now that our total reserves topped $300 billion and foreign exchange markets stabilized, we judged that conditions were ripe for us to increase gold holding.
The increased gold holding would put South Korea in 45th position in the World Gold Council's list of central banks holding gold, up from 56th previously, the Bank of Korea said.
The United States has the biggest gold holding in its reserves, at 8,133.5 tonnes, or 74.7 percent of total reserves, according to the WGC's July report. Germany is a distant second with 3,401 tonnes, or 71.7 percent of its total reserves.
The Bank of Korea declined to disclose the purchase price but said it had entrusted all of its gold holding to the Bank of England for possible use in gold lending and other related transactions.
Including the gold, South Korea's foreign reserves rose by $6.55 billion in July to $311.03 billion, equivalent to about 30 percent of the country's annual gross domestic product of just more than $1 trillion in 2010.
South Korea's foreign reserves ranked seventh in the world as of the end of June, the central bank said.
(Additional reporting by Rujun Shen in Singapore and Frank Tang in New York; Writing by Manolo Serapio Jr; Editing by Michael Urquhart)