[Viewpoint] Gold is the ultimate form of money

Since Korea is a country whose main source of income comes from exports, it’s almost axiomatic that the more we export, the better off we are. However, there are a few exceptions, and one of them is gold. If you have gold, it’s just as good as money. Gold could even be better than U.S. dollars, since it can be exchanged for any goods or currencies. Usually, the price of gold moves counter to the dollar, so they can complement each other. When the foreign currency market fluctuates drastically, as it did earlier this year, gold can be a reliable source of foreign currency reserve. A country with not a single major gold mine, like Korea, is always short on gold, so if we export gold today, we have to buy it back tomorrow. If the international price rises in the meantime, we face a loss.

This year, Korea became a net exporter of gold. In the first half of 2009, Korea sold 52.3 tons of gold at $1.5 billion, over three times the 15.8 tons that we imported. The figure is far more than last year’s export of 46 tons. That makes Korea one of the top 10 gold exporters in the world. How could this be possible, when Korea’s gold mines produce only about 200 kilograms (441 pounds) annually? An involved official said that the domestic gold price was cheaper than the international price, and the surplus from the decreased domestic demand was exported.

Does it explain the increased exports? Maybe, but there could be another reason. In Korea, gold enjoys a special status as neither a currency nor a commodity. It is used like a currency, but you pay a tariff of 3 percent to import gold, and pay a value added tax of 10 percent when buying or selling it. Moreover, the tax is paid by the buyer at the time of the trade, while the VAT for other goods is paid by the seller. Also, gold can only be deposited in designated accounts at certain banks. The tax services authorities made special regulations on gold trades because there have been many cases of tax evasion involving gold.

When taxes are raised, gold prices are increased at least by the margin of the tax hike. In other words, if you can avoid paying tax, you can make a greater profit. Such a mechanism is behind Korea’s sudden emergence as a gold exporter. When the international price of a certain commodity rises suddenly or the value of the Korean won drops drastically, the gap between the international price and the domestic price becomes instantly larger. That’s what happened to gold prices in early 2009. Nevertheless, you would not be able to make a profit of 1,000 won per gram if you properly paid all the taxes when exporting gold.

That’s where “export bombs” come into play. Export bombers collected and exported the so-called “backdoor gold,” then shut themselves down to avoid taxes. They reportedly made profits of about 8,000 won per gram. The backdoor gold is traded under the table, as opposed to the “front door gold,” for which all the taxes have been paid legitimately.

When the international gold price soared in April and March, the domestic gold price rose to over 200,000 won per 3.75 grams, and trade in backdoor gold became brisk. Belated efforts to control the illegal trade by the National Tax Service were futile.

If domestic gold prices drop and demand decreases, a similar tendency could be repeated. If we want to shed the nominal title of a gold exporter, we need to change our perception of gold. We have to treat gold as currency. There is no reason to impose value added tax on trading currency. By getting rid of the possibility of making profit through tax evasion, smuggling will be discouraged and legitimate trades will yield more tax revenues. It will also ease some trade friction.

Incidentally, both the United States and China have considerable trade deficits with Korea. But the U.S. is the largest gold owner in the world, with 8,133 tons, while China is the biggest gold producer and the fifth largest gold owner. If Korea buys gold from the United States and China, we can expect increased imports from them.

We can consider expanding the portion of gold in our foreign currency reserve. Gold is easier to exchange than dollars. Especially in today’s market when the status of the U.S. dollar is shaky, gold is more valuable as a foreign currency reserve. When the government buys low and sells high, it can control domestic supply and demand.

The Bank of Korea holds 14.3 tons of gold, worth about $400 million, which make up about 0.2 percent of the country’s foreign currency reserve. Gold makes up over 70 percent of the United States’ foreign currency reserve and 60 percent of Germany’s.

Other central banks keep about 10 percent of the foreign currency reserve in gold. It is about time the Bank of Korea abandons the excuse that, unlike bonds, gold does not yield interest profits. The amount of appreciation in gold prices has exceeded profits from bond yields. Gold is the ultimate form of money.

*The writer is the economic news editor of the JoongAng Sunday.

by Yi Jung-jae