Gold, due to its tangible form and relatively sustainable value, has been a highly appreciated asset throughout the ages but, ironically, transactions have remained largely unregulated.

The nation’s stock operator, the Korea Exchange, has now set its sights on this extensive “hidden” market, seeing it as an opportunity to revive the long-stalled derivative sector and, ultimately, to step up its financial leverage.

The KRX Gold Market sets sail on Monday, enabling securities firms and dealers to participate in gold trading under explicit rules and at a reasonably cheap price, according to KRX officials.

“The KRX Gold Market will offer a stable and efficient trading environment for dealers and potential investors,” said Yoon Seok-yoon, executive director of the KRX derivative market headquarters on Friday.

“Gold, despite the price fluctuations over the past years, is still a highly reliable investment and needs to be incorporated into a publicly authorized market.”

While the KRX will handle the actual market operations and payment settlement, the Korea Securities Depository is to supervise the storage and withdrawal of gold and the Korea Minting, Securities Printing & ID Card Operating Corp. is to do inspections and certify the quality.

Trading may take place in gram units, but the actual deposits and withdrawals must be in the form of 1-kilogram gold bars, according to officials.

Taking the first step in gold trading

So far, nine securities companies and 49 actual dealers have registered as members. Individual buyers or nonmember companies may participate in the deals via the registered securities firms.

Korea is currently estimated to have a yearly transaction volume of 100 tons or more in gold, but the exact figure has not been determined due to the lack of related regulations and rampant smuggling, according to the Financial Services Commission.

Also, gold is frequently preferred by those who wish to create secret funds or to evade inheritance taxes as it is far less traceable than bank account records or stocks.

“We expect around 20 percent of the actual deals to flow into the KRX Gold Market in the future,” said Gong Do-hyun, operation manager of the KRX Gold Market.

Though a large number of unregulated transactions will continue to take place, the establishment of a credible market will greatly reform the structure of the domestic securities business, according to the official.

“The KRX Gold Market is a part of the government’s plan to bring the underground economy into the light,” Yoon added.

The state-run stock operator also hopes that the success of the gold trading business may add vigor to the derivative sector, which has largely been stale since the global financial crisis.

In an aim to encourage hidden dealers to step into the open market, the KRX will exempt member companies from transaction fees until March next year.

But the market continues to remain prudent as it is still uncertain whether the benefits offered by the KRX Gold Market will indeed exceed the financial profits made by under-the-counter deals.

The KRX operated a mock trading system back in February, in the hope of inviting more companies to participate in the new business, but less than 10 companies actually accessed the system during the period.

“We expect it will take about two years for the market to become established,” Yoon said.

By Bae Hyun-jung (tellme@heraldcorp.com)