Dec 28, 2011

Is China Calling the End of the Gold Bubble?

PBOC has announced that all Gold exchanges except for the 2 main ones in Shanghai are to discontinue operations (see the English language US edition of China Daily). It thus forcibly consolidates the market within a few large players, that are easier to monitor and control by the authorities. So far nothing new. The Chinese government has always operated this way in regards to any politically sensitive areas of the economy such as banking, insurance and most recently rare earths exports.

The timing, however, is quite interesting. Gold has been going up and investor interest in it has been building for the past 10+ years. However the regulation tightening only comes now that the market has experienced a few major hiccups (see previous WhatIf posts on Gold below, also FT article on recent sharp decreases in Gold ETF holdings). Beijing probably fears a public backlash should Gold continue to collapse, causing large losses to naive individual investors. The memory of the vocal protests before the building of the Stock Exchange after the Shanghai Composite dropped from its lofty heights in the end of 2007 must still be fresh in their minds.

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