On Friday, the Shanghai Composite Index dropped 5.5 percent. What does it mean for the gold market?
China’s stock market had been rising steadily since the end of August, but it plunged suddenly on Nov. 27. Why? The most common explanation is the widening Chinese investigation into illegal trading activity. Three of China’s largest brokerages said that they were being probed for violation of market rules. That news triggered heavy selling in China on Friday as investors were afraid of a widening of the investigation to include medium-size brokers. The investment climate deteriorated so significantly that some people are afraid to trade even though they have done nothing wrong.
Last week was not too good for the China’s financial market. The China Securities Regulatory Commission banned brokers from using derivative contracts to finance stock purchases, while profits earned by Chinese industrial companies dropped 4.6 percent in October on an annual basis. Moreover, another two Chinese companies defaulted on their bonds.
The recurring problems prove two things. First, the Chinese stock market is at the whim of Chinese regulators. The Chinese stock market is not a true free-market stock exchange. Second, bubbles often deflate in waves. The last plunge suggests that this could be the next leg of the August selloff.
What are the possible consequences for the yellow metal? Well, in contrast to August, global stock markets largely shrugged off Friday’s tumble. Therefore, it seems that the recent plunge will neither change expectations of a Fed hike in December nor spur safe-haven demand for gold.
The bottom line is that the Chinese stock market plunged again on Friday. The 5.5 percent decline was triggered by news of the widening Chinese investigation into illegal trading activity. However, in contrast to August, the recent plunge did not cause serious global repercussions. This is bad news for gold, but the Chinese hard landing is one of the biggest economic black swans which could touch down in 2016.