FT is sure that new gold exchange in South Korea will flop


South Korea's New Gold Trading Platform May Lack Sparkle

By Song Jung-a
Financial Times, London
Monday, July 22, 2013


To much fanfare South Korea has announced it plans to set up a gold exchange in 2014 -- but analysts warned that it might be poorly timed, given weak demand for bullion amid the global economic slowdown.

The country's financial watchdog said on Monday that spot gold will be traded on its main bourse from early next year as the government is keen to boost transparency of gold trades and root out shady deals used for tax evasion.

The gold exchange will be set up in the first quarter so that individuals as well as institutional investors can trade bullion in the open market as they do stocks, the Financial Supervisory Commission said. It also added that local authorities would strengthen the clampdown on illegal deals through tougher tax probes.

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Government officials have pointed to gold buying as one of the most common ways used for tax evasion. About 100-110 tonnes of gold are traded in South Korea each year but more than half of the transactions are made illegally to avoid paying a 10 per cent value-added tax, the FSC said.

The move comes after the country's new president, Park Geun-hye, promised to strengthen tax collection through regularisation of the informal sector to boost welfare spending. Park promised to implement $119 billion of social spending over the next five years, without increasing public debt or most tax rates.

Government officials believe that the illegal gold trade could increase further as business leaders try to hide assets. Local authorities have strengthened their corporate tax probes since Park came to power in late February. The authorities said in May they had launched a probe into 23 companies and individuals suspected of tax evasion through shell companies in tax havens.

To encourage participation of individual investors, the trading units of gold will be as small as 1-10 grammes while 1kg of gold bar will be used for physical delivery, the FSC said. And the 3 per cent import tariff will be exempted on the gold traded on the exchange, it added.

Stocks, bonds, and financial derivatives are traded on the Korea Exchange. Although the country has a vibrant derivatives market for stock futures and options, the trading volume for gold futures remains very low.

Analysts were sceptical about the prospects of the gold exchange, saying it is an ill-timed plan. "Investor sentiment toward gold remains extremely weak, as no one expects gold price to go up any time soon," said Suh Ji-young, a researcher at Daishin Economic Research Institute. "Initial trading volume will be very low, although demand could recover in two to three years once the global economy recovers."

The precious metal dropped nearly 30 per cent from the start of the year to a low of $1,180 a troy ounce last month amid low inflation and the dollar's strength, although it has rebounded more than 10 per cent since to above $1,317 a troy ounce as fears of a rapid exit from monetary stimulus by the Federal Reserve eased.

Suh also noted that regularisation of gold trade could actually reduce demand for the metal. "For many of the buyers, tax evasion was one of the biggest merits because gold allowed them to hoard wealth without paying taxes. Now that the merit is gone, demand will likely be reduced," she said.

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