Gold Prices Spike as South Korea Buys

Gold prices were hitting record highs Tuesday as the Bank of Korea announced it bought gold for the first time since 1998, reminding investors of gold's large safe haven appeal as global economies slow.

The Bank of Korea announced it bought 25 tons of gold over the past two months, valued at $1.24 billion, or roughly $1,550 an ounce. Central banks tend to buy gold when they need to diversify or increase their holdings as mandated by the government and are not necessarily market timers, but they do buy as a long term investment.

The purchase brings Korea's total gold holdings to almost 40 tons, still a fraction of the bank's total reserves compared to the U.S. or Portugal, which hold 74% and 84% of its reserves in gold, respectively, according to the World Gold Council.

The purchase, however, does underscore the fact that central banks have become net buyers of gold, adding a huge floor under the gold market and reminding investors that countries are purchasing large quantities. Official sector buying in the first quarter was 129 tons, according to the World Gold Council's Gold Demand Trends report, led by Mexico which bought 93 tons.

"There has been a fundamental shift in the behavior of central banks," says Natalie Dempster head of government affairs for the World Gold Council. "Central banks on the whole have been net sellers of gold for the past two decades."