South Korea's Reserves

1. Introduction

South Korea has approximately 330 billion dollars of total reserves, which gives top 8th ranking to South Korea. However, South Korea’s gold reserves accounts for only 1.4% of total reserves, which is quite low compare to other top 30 of total reserves countries, whose average of gold reserves is about 16% of total reserves. Then, why South Korea has a low level of gold reserves and what can be the optimal level of gold reserves? Similar answer to this question, Bingnan et al. suggested China’s optimal level of gold reserves holding. (Bingnan et al., 2012)

One more thing we need to take into account is QE, Quantitative Easing. QE is the program that Fed purchases treasury bonds and mortgage securities after financial crisis in 2008 in order to lower the interest rate and boost the economy. An interesting argument after QE is that United States needs to make a transition to a new gold standard due to high dollar inflation. (White, 2012) Since the potential risk for QE is inflation and gold is considered inflation averse asset,

In addition, we need to take into account one more important factor to decide the level of gold reserves. That’s Quantitative Easing, Therefore, to increase gold reserves seems like reasonable to hedge inflation risks. Then, what can be the optimal level of gold reserves for South Korea after QE? Consequently, this paper suggests that South Korea’s gold reserves to GDP should be 2.4%, which values about 2.5 billion dollars as of 2012, and the 2.4% of gold reserves to GDP comes from the average of top 30 countries of total reserves.

South Korea seems like one of the most outperforming countries in the world since 1960s and today it’s turning into a developed country. Since South Korea doesn’t have enough natural resources, it has tried to focus on technology-intensive industries, such as IT and automobile, and