South Korea boosted its gold holdings by nearly a third in July, buying 16 tonnes as part of the central bank's efforts to diversify its massive foreign exchange reserves.

South Korea is Asia's fourth largest economy and its central bank said on Thursday that it now holds 70.4 tonnes of gold, after paying $810 million last month for the purchase.

The increase barely lifted gold prices but supported expectations that central banks will remain gold's key buyer as increased volatility in global markets and waning confidence in the U.S. dollar fuel a global drive to vary foreign reserves away from the U.S. currency and government debt securities.

"The markets were stable in July and we judged the conditions were good for us to make the purchase then," said Lee Jung, head of the investment strategy team at the Bank of Korea's reserve investment division.

Like most central bankers, Lee declined to provide the exact price per ounce the bank paid for the bullion. Reuters calculations show the Bank of Korea paid about $1,582 per ounce on average, slightly lower than the average spot gold price of about $1,592 for the month.

Gold prices gained nearly 1 percent in June, and hovered near $1,620, down about 16 percent from the record high above $1,920 hit last September.


The latest purchase was the third by the Korean central bank since June last year, when it started increasing its reserves after leaving them unchanged for more than a decade.

In the last 13 months, South Korea's gold reserves have grown five-fold but remain only a fraction of China's over 1,000 tonnes and Japan 765 tonnes, according to the World Gold Council (WGC).

Central banks bought 80.8 tonnes of gold in the first quarter, adding to 2011 purchase of more than 450 tonnes, the WGC said. In recent months, a number of countries including Russia and Kazakhstan also increased their gold reserves, data from the International Monetary Fund showed.

"We have been of the view that we would increasingly see more diversification of reserves and investments into gold," said Chirag Mehta, gold fund manager at Quantum Mutual Fund in Mumbai, India. "This trend is likely to continue".

Gold now accounts for 0.9 percent of the value of South Korea's total foreign reserves at the end of July, up from 0.7 percent a month earlier, the central bank said. The total book value of its gold holdings was at $3.0 billion, it added.

South Korea's foreign reserves of more than $300 billion ranked the seventh in the world and were equivalent to about 30 percent of its annual gross domestic product.

The South Korean central bank said it now ranked 40th in the world in gold holdings at the end of July, up from 43rd in June.