Invest1 publisher2 min readPublished
Korea Exchange builds separate gold channel for Bank of Korea to buy domestic bullion, purchase size still undecided
Korea Exchange will route the Bank of Korea's first physical gold buying in 13 years into block trades separate from ordinary orders starting Dec. 14. The 4 to 5 tons a year in view is gold two producers had been exporting, so the price that counts is the one the bank agrees with them directly.
The Investor · Invest desk
What happened
- In August the Bank of Korea said it would buy, through the KRX Gold Market, gold from LS MnM and Korea Zinc that was set to be exported.
- Gold bought through the bank's dedicated account cannot be resold on the exchange by any route and is stored apart from ordinary gold.
- The bank holds 104.4 tons, unchanged since it bought 90 tons overseas between 2011 and 2013.
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Why it matters
- decision LS MnM and Korea Zinc now weigh each export shipment against a sale to the central bank on price and quantity terms they negotiate directly, outside competitive bidding.
- constraint Any future sale of reserve gold bought this way would have to happen off the KRX Gold Market, so the channel can only remove supply from it.
- cost Withdrawals before Jan. 1 fall outside the VAT exemption, so gold bought in the rules' first 18 days has a tax reason to stay in exchange storage until the new year.
- capability Commercial banks can now reach the exchange's gold order system without running a physical-gold business, so access widens beyond the one central-bank buyer the rules were written for.
At the July-August average of 5.14 tons a month [1], 4 to 5 tons of purchases would equal 78% to 97% of one month on the KRX Gold Market [2], or 6.5% to 8.1% of a year's trading at that pace [3]. The exchange is keeping the bank's orders separate to limit the effect on on-exchange prices and supply and demand [1]. The bank may buy only in negotiated block trades, with price and quantity agreed with producers in advance and no competitive bidding [7]. The gold it has in view had been leaving the country [4]. On Seoul Economic Daily's account, the bank's tonnage comes out of exports and never passes through the order book general investors trade on.
The separation could still fail in two ways. One is diversion. LS MnM and Korea Zinc export roughly a tenth of their output [4]. If the bank's negotiated price beats what they get for gold they keep at home, some domestic supply could move into the block channel instead. The report does not say how that price will be set or whether purchases are capped at export volumes. Size is the other. According to the paper, an official in the financial investment industry said the timing and size of the first purchase will likely be decided after weighing producers' export plans, domestic and overseas gold prices and conditions for managing reserves [13]. The 4 to 5 tons is a figure taken from export data, and the first trade could come in below it.
I think the track holds, mostly because the tonnage is small against the bank's reserves as well as against the exchange's volume. Buying 4 to 5 tons a year would add 3.8% to 4.8% to the 104.4 tons the bank has held since 2013 [5][11]. Matching the 90 tons it bought overseas in 2011-2013 would take 18 years at 5 tons a year, or 22.5 at the low end of the export range [6]. Its other gold move this year was a first investment in an overseas-listed physical gold ETF in the second quarter [12]. The counter-case is that a bid negotiated directly with two sellers gives them a reason to hold domestic supply back while talks run. That would show up on the exchange even though the bank never enters a competitive order.
The thesis fails if KRX Gold Market prices open a premium over overseas prices in the months the bank buys, or if monthly volume falls out of the 5-ton range once the rules noticed on Sep. 28 take effect on Dec. 14 [2][3][6].
What to watch
- Whether the final rules, noticed on Sep. 28, keep the block-trade-only and no-resale terms intact when they take effect on Dec. 14.
- LS MnM and Korea Zinc export figures for next year, to see whether the bank's tonnage came out of exports or out of gold previously sold at home.