With the Bank of Korea moving to resume physical gold purchases for the first time in 13 years, the Korea Exchange has put in place the regulatory framework for the central bank to buy domestically produced bullion. The annual volume the central bank could consider buying is roughly equal to one month of recent trading on the KRX Gold Market, and the exchange plans to apply a system separated from regular orders to limit the impact on on-exchange prices and supply and demand.
According to the financial investment industry on the 29th, the Korea Exchange gave advance notice the previous day of amendments to the KRX Gold Market operating rules, enforcement details and participation agreement. The core of the changes is to establish trading, storage and settlement procedures so that the Bank of Korea can buy domestically produced gold on the KRX Gold Market as part of managing foreign exchange reserves. The amended rules are set to take effect on Dec. 14 this year.
The rule changes are a follow-up step to translate into actual trading the central bank's August announcement that it would resume physical gold purchases. At the time, the Bank of Korea said it would pursue a plan to buy, through the KRX Gold Market, gold produced by LS MnM and Korea Zinc that was set to be exported overseas. The approach secures a new purchasing channel that can absorb part of the domestically produced gold that had been flowing out of the country into assets held as foreign exchange reserves.
According to the Bank of Korea, of the combined annual gold output of LS MnM and Korea Zinc — about 40 to 45 tons — the volume exported overseas is around 4 to 5 tons a year. Recent trading volume on the KRX Gold Market, meanwhile, was tallied at 5.05 tons in July and 5.23 tons in August this year. That means the annual export volume the central bank could consider buying is similar to one month of recent trading on the market.
In response, the exchange decided to apply a separate trading framework so that the central bank's gold transactions do not mix directly with orders from general investors. The Bank of Korea will be able to buy gold only through negotiated block trades, in which price and quantity are agreed in advance with producers, rather than through regular competitive bidding. A dedicated Bank of Korea negotiated block purchase account has been created, and gold bought through it will be managed separately in that account. Access to the order-entry program, previously limited to proprietary trading members that are physical gold businesses, has also been explicitly expanded to non-physical businesses including the central bank and commercial banks.
The rules also block purchased gold from returning to the market as sell orders. Gold bought through the dedicated account cannot be resold through either competitive bidding or negotiated block trades. By storing gold held for foreign exchange reserves separately from ordinary gold, the structure separates the process from purchase through storage from general market supply and demand. The Bank of Korea will also use a gold trading account under the Restriction of Special Taxation Act when settling payments for gold transactions. Value-added tax will be exempted when gold bought on the KRX Gold Market is withdrawn for the purpose of building foreign exchange reserves, and the exemption applies to withdrawals made on or after Jan. 1 next year.
The Bank of Korea, meanwhile, bought an additional 90 tons of gold overseas between 2011 and 2013 and has not increased its physical holdings since, leaving it with 104.4 tons. In the second quarter of this year, it invested for the first time in an overseas-listed physical gold exchange-traded fund as part of managing foreign exchange reserves, and with the latest rule changes, domestic physical gold purchases through the exchange have also come into view.
An official in the financial investment industry said the timing and size of the first actual purchase will likely be decided after comprehensively weighing producers' export plans, domestic and overseas gold prices and conditions for managing foreign exchange reserves.
