SEOUL—The global rally in gold, fueled by a weakening dollar and expectations of U.S. interest rate cuts, has hit South Korea with a disproportionate force, driving local prices to unprecedented levels and sparking investment warnings. As international spot gold prices pierced the $4,100 per ounce mark for the first time in history, the domestic market is grappling with a severe supply-demand imbalance, pushing the so-called "Kimchi Premium" to over 16%.

The Kimchi Premium, a term originally coined for the price gap in cryptocurrencies, refers to the extent to which a commodity trades at a higher price in South Korea compared to international markets. On October 14, the price of gold on the Korea Exchange (KRX) Gold Market hit KRW 219,900 per gram. Converted to a per-ounce basis, this translates to roughly KRW 6.2 million, significantly higher than the international spot price of $4,133 (approx. KRW 5.92 million) on the same day.

The price disparity is stark: the premium reached 14.8% on October 14, soaring from just 1.3% a month earlier. This means a standard gold ring (3.75g, or one don) costs domestic buyers an estimated KRW 824,625 in Korea, approximately KRW 106,000 (or over $70) more than the KRW 718,350 international rate (excluding processing fees). The price surge is not only due to the global rally but is compounded by a local frenzy that is outstripping available physical supply.

Domestic Prices Skyrocket

Over the recent three trading days, the price of gold per gram on the KRX surged by 17.4%, far outpacing the 9.9% rise in international gold prices (adjusted for the exchange rate). This over-the-counter demand has also translated into a surge in gold-backed Exchange Traded Funds (ETFs). Over the past month, investors poured hundreds of billions of Korean Won into domestic gold spot ETFs, underscoring the aggressive local rush for the safe-haven asset. The net assets of one leading gold ETF are now nearing KRW 2.5 trillion.

Analysts attribute the escalating Kimchi Premium primarily to a short-term failure of supply to meet the exploding domestic demand. This speculative fervor is also supported by broader macro factors, including the depreciation of the Korean Won against the US Dollar and a general negative outlook on the dollar's value amid inflation concerns. Globally, the continuous gold accumulation by central banks, notably China's, has also reinforced expectations of a sustained bull run.

Correction Warnings Loom

However, with the premium reaching historic highs, market authorities and analysts are sounding a loud alarm, warning investors of potential losses due to a sudden price correction.

"Investors should exercise caution considering the recent widening gap between KRX gold market prices and international market prices," stated a Korea Exchange official.

The risk is not theoretical. Earlier this month, a sharp contraction in the Kimchi Premium—from 16% to 9%—led to a 10% drop in the domestic gold price in a single hour, resulting in significant paper losses for those who bought at the peak premium. Experts emphasize that gold typically adheres to the 'law of one price' globally, making the current high divergence unsustainable.

Furthermore, some analysts are forecasting a broader market adjustment. Kang Hyun-ki, a researcher at DB Securities, suggested that a potential resumption of U.S. Federal Reserve interest rate cuts could see gold lose ground to U.S. Treasury bonds in the 'safe-haven' competition. Paul Ciana, a technical analyst at Bank of America, also warned of a possible short-term correction after a rally that has lasted nearly a decade, urging caution as prices cross the $4,000 and $5,000 thresholds.

As the global gold price continues its record-breaking ascent, South Korea's gold market faces a critical juncture. The elevated Kimchi Premium underscores both the country's unique investment landscape and the palpable fear of missing out (FOMO) that grips local retail investors, who may be risking sharp losses if the market corrects to align with global prices.