[Practical Finance] The 'New Golden Era' After 11 Years... Stock Uncertainty Boosts Gold and Silver Bars

Ultra-Low Interest Rate Trend and COVID-19 Impact
Gold Bar Sales Dropped by 900 Million Won in February
Surged Over 9 Times in One Month, a 'Reversal'

[Asia Economy Reporter Jo Kang-wook] Due to the impact of the novel coronavirus infection (COVID-19), the preference for safe assets has spread, leading to increased interest in the so-called 'Gold Tech.' As gold prices hit record highs day after day, gold demand is rapidly increasing, causing a shortage not only of gold bars but also silver bars. The historically low base interest rates have eliminated high-interest savings and time deposits, and the uncertainty in major stock markets such as those in the U.S., China, and Japan has left no suitable financial products, further fueling the popularity of Gold Tech. Some even claim that a 'new era of gold' has arrived for the first time in 11 years.

According to the financial sector on the 20th, four major commercial banks?KB Kookmin, Woori, Hana, and NH Nonghyup?sold about 6.756 billion KRW worth of gold bars in March alone. This figure is more than three times the sales amount of about 2.02 billion KRW at the end of February. Earlier this year, as investors sought to secure dollars in preparation for uncertainties caused by COVID-19, gold bar sales in February decreased by about 900 million KRW compared to January. However, the mood reversed within a month. Recently, as countries around the world, including the U.S., have engaged in quantitative easing, currency values have fallen, while investment sentiment toward safe assets has relatively increased. In one bank’s case, gold bar sales in March surged more than ninefold compared to the previous month.

Gold bars are a product where physical gold is bought and sold directly at bank branches, making it an easy direct investment method. Wealthy individuals mainly purchase 100g or 1000g gold bars. Among general investors, mini gold bars weighing 10g or 37.5g are popular. They can be purchased through various channels such as the Korea Gold Exchange, commercial banks, TV home shopping, department stores, and online shopping malls. When buying gold in physical form, a 10% value-added tax (VAT) is paid, which cannot be refunded upon resale, so it is important to note that gold prices must rise at least 10% to avoid losses.

Recently, as governments and central banks worldwide announced economic stimulus measures, gold prices rebounded on expectations. Currently, the international gold price is approaching $1,800 per ounce and remains strong. On the 13th (local time), gold prices at the New York Commodity Exchange (COMEX) reached $1,785 per ounce. This is a steady increase from $1,400 per ounce traded four weeks ago.

One way to trade gold is through the KRX Gold Market. On the Korea Exchange gold market, investors can open accounts and trade gold according to KRX prices just like stocks. The trading unit is 1g, and while on-exchange trading is exempt from VAT, a 10% VAT is charged when physically withdrawing gold. As of the 16th, the gold price in the KRX gold spot market was 68,220 KRW per gram. This was the highest since the KRX gold spot market opened in March 2014. At the beginning of this year, gold prices were around 56,860 KRW, rising more than 16% in two months.

According to the Korea Gold Exchange, on the 17th, the purchase price of one don (3.75g) of gold reached 271,000 KRW, the highest this year. The cumulative number of purchases in the first quarter exceeded 23,274 cases, and the amount of gold purchased surpassed 2 tons, which is about 32 times the 732 cases during the same period last year.

Silver bars are even experiencing a 'shortage phenomenon.' The total number of sales transactions at the Korea Gold Exchange reached 46,909 in the first quarter of this year, a 1.8-fold increase compared to 25,365 in the same period last year. Among these, silver bar transactions accounted for 9,473 cases, or 20%. The Korea Gold Exchange analyzed the recent silver shortage by stating, "Investor expectations are driven by the anticipation that once the COVID-19 situation stabilizes and the global economy rebounds, the price gains in silver will be greater than those in gold." In fact, KB Kookmin Bank’s silver bar sales volume last month was 310kg, about nine times higher than the previous month’s 35kg. From the beginning of this month to the 10th, sales volume reached 106kg, already more than three times that of the previous month.

The soaring gold prices and demand for gold bars are expected to continue for the time being. Global investment bank Goldman Sachs stated, "Central bank policies responding to the COVID-19 pandemic are causing inflation concerns," and forecasted that gold prices could reach $1,800 per ounce (approximately 2.2 million KRW) within 12 months. Some even say that the era of gold has arrived for the first time in 11 years.

Choi Jin-young, a researcher at Ebest Investment & Securities, said, "Considering that low interest rates and abundant liquidity are inevitably maintained for the time being, gold prices in the second quarter of this year will reach around $1,800 per ounce," adding, "By the end of the year, gold will break record highs, ultimately presenting an opportunity for the first time in 11 years."