Strong demand for gold, coupled with a movement of the metal to New York, has caused a dramatic problem in the production of gold bars at the state-owned Korea Minting and Security Printing Corporation (KOMSCO).
KOMSCO mints coins and gold bars, as well as other “security items” such as banknotes, identity cards, and passports. Among its many products, the government “company” supplies gold bars to commercial banks, retail outlets, and online shopping malls in Korea.
Due to a shortage of raw gold available at nearby refineries, the Mint was forced to suspend the sale of gold bars last month, and the suspension continues.
The problem appears to be a combination of strong retail demand for physical gold in South Korea and a disruption in the gold market due to the movement of gold to the West, coupled with poor planning on the part of KOMSCO.
Earlier this year, gold and silver futures prices traded on the COMEX rose above the spot price of gold in London and other markets. Traditional analysts attribute the dynamic to the threat of tariffs pushing the price of gold (and silver) futures higher in New York, but as Chris Powell reported, there may be a more fundamental problem at play: the fact that there is much more gold on paper than physical metal.
Regardless of the reason, the gold movement has triggered record outflows of gold from London vaults and has also put pressure on availability in Asia. According to a Reuters article last month, “global bullion banks are shipping gold to the US from trading hubs that serve Asian consumers, including Dubai and Hong Kong, to capitalize on the unusually high premium that US gold futures are enjoying over spot prices.”
At the same time, there has been an increase in retail demand for gold products in South Korea.
Last year, Korea's largest convenience store chain, CU, partnered with Korea Minting and Security Printing Corporation (KOMSCO) to offer customers gold bars the size of a fingernail. The bars come in a range of sizes from 0.1 grams to 1.87 grams. The largest bars sell for 225,000 won, equivalent to about $165. The gold is packaged in cards featuring various graphics and messages.
Similar products are sold in vending machines.
According to a CNBC report, the machines in Seoul have sold out of their small bars. An analyst at State Street Global Advisors told CNBC that this reflects the growing demand for gold.
"The sudden surge in demand for gold in South Korea has led Korean banks to temporarily suspend sales of gold bars at the request of KOMSCO, as there are not enough gold bars in the country to meet local demand.”
Analysts say several factors, including domestic political turmoil, coupled with geopolitical and economic uncertainty sparked by the threat of a trade war, are driving demand for safe havens.
South Korean President Yoon Suk Yeol is embroiled in an impeachment trial after declaring martial law last December.
According to the World Gold Council, investment in South Korean gold bars and coins rose 29 percent in the fourth quarter of 2024. Meanwhile, the South Korean won fell 11 percent against the US dollar.
Natixis analyst Bernard Dahdah told CNBC that the increase in demand for gold makes sense given the current climate.
“If you're worried about your currency devaluing, you switch to gold. If you don't have confidence in your stock market, you switch to gold."
Bad decisions by government planners
It also appears that KOMSCO made some bad decisions, exacerbating its current shortage.
As noted, there has been an increase in gold being moved to New York over the past three months. Traders have made deliveries to COMEX in one-kilogram bars, the preferred form of commercial gold in Asia and the Middle East. World Gold Council analyst John Reade has speculated that, in their eagerness to take advantage of arbitrage opportunities in New York, traders have been searching the globe for gold bars.
“Korean refiners and wholesalers probably got a phone call saying, 'We'll buy all your stock at a very high price, put it on a plane, and send it to New York.'"
Stefan Gleason, CEO of Money Metals Exchange, said refiners probably took advantage of the offer to make a quick buck and that mints such as KOMSCO were left speechless.
“The refineries did what made sense to them at the time, and their customers were unprepared and left stranded. Now it will take time and higher premiums in the wholesale market to attract more gold to Asia.”
“The premium that could be obtained by delivering large gold bars to COMEX exceeded $50 per ounce at one point. If you are in the business of minting and selling small bars, you will get a much higher premium for those items, so you better make sure you have enough gold raw material, even if you have to pay more for it. Poor planning by mints invariably damages relationships with their retail customers and distributors."
The problems seen at the Korean-owned mint are similar to those seen at other government mints from time to time. Gleason pointed to the sad saga of the recent American Silver Eagle shortage and sky-high premiums caused by mismanagement at the US Mint, as explained in his 2022 article, “The World's Most Overvalued Silver Coin.”
“Government mint bureaucrats are either unable or unwilling (or both) to find creative ways to increase production. Always keeping inventory current, they have flatly refused to accumulate surpluses of these coins during periods of lower demand. God forbid the US Mint should have any extra silver on its shelves!”
Gleason noted that private mints have historically been more reliable suppliers and offer more reasonable and stable prices, which is one reason Money Metals encourages customers to focus on round coins and bars rather than government-minted coins.
Mike Maharrey, Money Metals