South Korea’s equity exchange started offering physical gold trades for the first time today, as the government seeks to curb as much as $3 billion of black-market transactions.
Korea Exchange Inc., which has had bullion futures since 1999, aims to gradually replace illegal sales that total as much as 70 metric tons annually and deprive the state of an estimated $280 million in taxes. Customs officers intercepted 360 kilograms last year as the number of busts more than doubled from 2012.
Purchasing gold bars is a common way to hide income in Korea, where a shadow economy of unreported buying and selling accounts for a quarter of gross domestic product. While Korea Exchange will reduce taxes on physical trades, smuggled gold is likely to remain as much as 7 percent cheaper, according to the Korea Precious Metals Distributors’ Association.
“It’s a big struggle for us to maintain our transparent business in an industry that’s tainted by illicit deals,” said Jeong Byung Nam, a director at Samduck Metals Co., a refiner from Incheon, west of Seoul. “Companies like us have to go into this physical exchange with a sense of duty or patriotism because it hardly offers us any benefits.”
Samduck is among the 57 refiners, jewelers and securities firms that have joined the trading platform. Others include Samsung Securities (016360) Co., Hyundai Securities Co., Shinhan Investment Corp., Woori Investment & Securities Co., Daesung Metals Co. and Korea Gold Trading Center.
While traders on Korea Exchange get a waiver on the 3 percent import duty for gold, they still pay a 10 percent value-added tax for taking physical delivery of bullion. Those who trade without taking possession of the metal will receive corporate tax deductions and a VAT exemption, according to the exchange.
“There’s no meaning to it if the exchange simply absorbs existing legal transactions,” said Yu Dong Soo, chairman of the Seoul-based distributors’ association. “Allowing investors who take physical delivery to benefit from tax exemptions would make it attractive for distributors.”
Korean Exchange is using 1-gram units of bullion of 99.99 percent purity to spur liquidity. Delivery will be in 1 kilogram bars. Trading hours are 10 a.m. to 3 p.m. local time.
There has been no trading in standard 1-kilo futures in Seoul for the past three years, while average daily transactions for so-called mini-futures representing 100 grams was 141 contracts in 2013, exchange data show.
Prices in the the physical market closed today at 46,950 won per gram ($1,350 an ounce), with 5,978 grams traded, according to the exchange’s website.
Gold for immediate delivery on global markets has rebounded 10 percent this year and traded at $1,324.17 an ounce at 5:41 p.m Seoul time.
On the Tokyo Commodity Exchange, daily trading in January averaged 28,501 contracts, each for 1 kilo, while physical trade on the Shanghai Gold Exchange averaged 15,806 kilos each day in January, data from the bourses show.
Yoon Suk Youn, an executive director at Korea Exchange for derivatives markets, said he was taking a long-term view.
“It won’t happen overnight,” he told reporters at a briefing on March 21. “We expect that it will take at least one or two years to have an impact.”
Reducing illicit trading in gold is part of a wider campaign by President Park Geun Hye’s government to wring an extra 27.2 trillion won in revenue out of the underground economy.
The National Tax Service is increasing scrutiny of groups from bar owners to doctors to mom-and-pop retailers, while the Korea Customs Service said it’s contending with a jump in trafficking from smugglers who obtained bullion overseas last year as global prices slumped 28 percent.
South Korea’s shadow economy was equal to almost 25 percent of gross domestic product in 2010, above an average 18 percent for OECD members, according to a paper by the Institute for the Study of Labor in Bonn, Germany.
Of as much as 110 tons of gold traded in the nation each year, about 70 tons are estimated to be on the black market in Korea, Asia’s fourth-largest economy, the Financial Services Commission said in July. The FSC said the value was as much as 3.3 trillion won, or about $3 billion.
The Bank of Korea held 104.4 tons in its vaults as of January, according to data from the World Gold Council. South Koreans hold almost seven times as much as their central bank, Wolgok Jewelry Research Center and Gallup Korea said in a joint report in March last year.
The Asia financial crisis of 1997-1998 brought part of the hoard into the light. About 3.5 million Koreans came forward with 250 tons of gold to ‘Save The Country’ after its foreign exchange coffers were drained, according to a report dated May 1998 from the London-based WGC and data from the government in Seoul.
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