As South Korea’s gold market experiences a sharp downturn following an overheated investment frenzy, many individual investors face unexpected losses due to the sudden collapse of the so-called “kimchi premium,” a phenomenon where domestic gold prices trade significantly higher than international rates.
Amid a recent surge in gold investments, Choi, a 30-year-old office worker, finds himself grappling with unexpected challenges.
In mid-February, Choi invested an entire month’s salary into physical gold, buoyed by its soaring prices. Following President Donald Trump’s inauguration in January, market buzz suggested gold as a promising asset, fueling a fervent investment climate.
However, the situation took a sharp turn recently. Gold prices, which had surpassed 160,000 won per gram (approximately $110), have since plummeted, dropping below $96 per gram. Choi expressed his confusion, stating, “I believed gold was a safe asset, but I don’t understand why it’s fallen this much.”
The losses Choi faces are largely attributed to the so-called “kimchi premium.” This term describes scenarios where assets like gold or cryptocurrencies trade at higher prices domestically compared to international markets. The recent contraction of this premium in S. Korea has led investors to incur unforeseen losses. Experts advise caution, emphasizing the need to be mindful of discrepancies between domestic and international prices when investing.
On Mar. 4, data from the Korea Exchange (KRX) indicated that the closing price of 1 kilogram of 99.99% pure gold was about $95.51 per gram. This marks a roughly 15% decline from the closing price of approximately $112.34 on Feb. 14.
Gold prices hit an all-time high during intraday trading on Feb. 14, soaring to $115.76 per gram However, they have been on a steady decline for nearly two weeks since. That said, there were slight rebounds on Feb. 28 and Mar. 4.
While gold prices in S. Korea have seen significant declines, international gold prices have remained relatively stable. Between Feb. 14 and 28, international gold prices experienced a modest decrease of about 1%. In contrast, S. Korea’s gold prices fell by approximately 15% during the same period, a drop 15 times greater than that of the international market.
On Feb. 14, the premium between KRX gold prices and international gold prices reached up to 24% during intraday trading, an unprecedented level. However, following warnings from securities firms about an overheated gold market, this premium began to diminish, dropping to around 1% on the morning of Feb. 28.
The “kimchi premium” phenomenon isn’t confined to gold; it also appears in cryptocurrency markets, such as with Bitcoin.
According to data from Cryprice, a cryptocurrency market comparison platform, as of 11:30 a.m. on March 4, Bitcoin’s kimchi premium stood at approximately 3.33%. On S. Korean exchange Upbit, one Bitcoin traded at approximately $8,618.29, while on international exchange Binance, it was priced over approximately $275 less.
Such premiums become particularly pronounced when investment fervor leads to surging demand. In the case of gold, the inauguration of President Trump and a heightened preference for safe assets converged to amplify demand, while in the cryptocurrency market, speculative fever aiming for rapid profits further fueled the trend.
Specifically, gold faces supply issues. A representative from the Korea Exchange noted, “Since physical transactions are fundamental in domestic exchanges, when demand surges rapidly and supply is insufficient, these issues are immediately reflected in prices.”
Experts caution that the kimchi premium is akin to a “bubble” that can dissipate at any time. Once the premium vanishes, asset prices can plummet, posing significant risks of substantial losses to investors.
Park Hyun-sun, a team leader at KB Kookmin Bank’s Jamsil Lotte PB Center, observed, “The high disparity between international and domestic gold prices may be due to an unprecedented increase in individual investors, leading to a reckless investment. High premiums tend to revert to their true value, so it’s prudent to exercise caution with domestic gold investments until the premium narrows.”
Hwang Byung-jin, a researcher at NH Investment & Securities, suggested, “Until the premium on KRX gold spot prices is resolved, investing in gold futures ETFs might be more advantageous than spot ETFs.”
