Gold bars produced by LS MnM [Courtesy of LS MnM]
Gold bars produced by LS MnM [Courtesy of LS MnM]

Countries with higher shares of dollars and gold in their foreign exchange reserves suffer less when the United States unexpectedly raises interest rates, according to new research. The Bank of Korea, which has not added to its gold holdings since 2013, has recently completed preparations to expand its gold-related investment.

The BOK Economic Research Institute recently highlighted a paper in its latest overseas academic digest titled "Spillover Effects of US Monetary Policy in an Era of Geopolitical Fragmentation and Foreign Exchange and Gold Reserve Assets." The paper was authored by Joshua Aizenman, a professor at the University of Southern California; Jamel Saadaoui, an economics professor at the University of Paris 8; Gazi Salah Uddin, a professor at Linköping University; and Yago Naoki, an assistant professor at the University of Reading.

The paper found that an unexpected 0.1-percentage-point increase in the US Federal Reserve's policy rate caused other countries' currencies to depreciate by an average of about 0.4 percent. Countries holding above-average amounts of dollar-denominated assets and gold saw that impact meaningfully reduced. When a country's dollar-denominated reserves as a share of GDP exceeded the average of all countries studied by 20.4 percentage points, currency depreciation narrowed by up to 0.1 percentage point.

By contrast, holdings of non-dollar assets showed no statistically significant buffering effect.

Gold reserves also provided a cushion: when a country's gold holdings as a share of GDP exceeded the average by about 1.9 percentage points, currency depreciation narrowed by roughly 0.04 percentage point. The paper noted that while gold's exchange-rate buffer was smaller than that of dollar-denominated assets, it could serve a complementary role as a reserve asset hedge against risks such as financial sanctions.

The paper also found that countries with larger dollar-denominated external debt experienced sharper currency depreciation when US monetary policy tightened — and benefited more from dollar and gold reserve buffers.

The BOK Economic Research Institute said that to strengthen resilience against external shocks such as US monetary tightening, "comprehensive management is needed that considers not only the total volume of foreign exchange reserves but also the composition of reserve assets — including dollars and gold — alongside access to international liquidity safety nets such as currency swap and repo lines."

The Bank of Korea has recently been reviewing plans to expand its gold reserve holdings through purchases of gold ETFs, among other instruments.

The BOK's gold holdings are currently among the lowest of major central banks. According to a World Gold Council report, the Bank of Korea held 104.4 tons of gold as of the end of last year, ranking 39th among the world's central banks. Gold accounted for 3.2 percent of its total foreign exchange reserves, placing it near the bottom globally — behind Hong Kong at 0.1 percent and Colombia at 1.0 percent.

The Bank of Korea has not purchased additional gold since 2013, citing lower liquidity and higher volatility compared with bonds and shares. As gold prices have surged in recent years and central banks around the world have aggressively added to their holdings, the BOK has opened accounts for investing in overseas-listed physical gold ETFs and completed related groundwork. It is also reviewing further gold investment.


kimstar@heraldcorp.com