12:15 pm - Tuesday November 3, 2015

Gold Tumbles to More Than Five-Year Low, China Shares Eke Out Gains

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Gold prices tumbled to a more than five-year low Monday, and China shares rose modestly, after authorities’ weekend move to tighten the use of informal lending channels by stock investors.

Gold fell 2.3% in a matter of minutes early Monday, after China’s central bank reported on Friday its gold reserves were half the expected level, up 57% to 53.32 million troy ounces. China is one of the biggest gold buyers globally, and the report showed its central-bank holdings are the fifth-largest in the world. China doesn’t consistently disclose its level of gold reserves.

This latest signal of slackening demand tops a growing list of factors tarnishing the precious metal in recent weeks. Positive U.S. economic data, from home-building statistics to consumer prices, has firmed expectations the Federal Reserve will raise short-term interest rates later this year.

Some analysts say that’s also sparked selling among funds skeptical the metal will resume its decade long rally, which ended in 2011. Higher bond yields and a resurgent U.S. dollar diminish the appeal of gold, which produces no income and costs money to hold. Spot gold is currently trading at $1,106 an ounce.

“This kind of sharp drop during early Asian hours is a strong indication that a big fund is selling their holdings of gold,” said Gnanasekar Thiagarajan, director of Commtrendz Risk Management.

Meanwhile, the Shanghai Composite Index closed 0.9% higher at 3992.11, after gaining 3.5% last week. It remains down 22.7% from its seven-year-plus high hit in June. The smaller Shenzhen index ended up 1.8% at 2230.29, after jumping 7.6% last week. The index is down 29% from a June peak.

The Hang Seng Index was up 0.2% at 25354.70, after its first weekly gain in five of 2.1%.

Beijing’s efforts to prop up the market appear to have stemmed a slide that left markets with trillions in losses earlier this month. The amount of borrowed money used to buy stocks has fallen roughly 37% since a peak in mid-June, according to Wind Information Co. Still, investors are wary whether government measures—including easing rules on loans to buy shares, suspended trading of some stocks, cutting interest rates and halting initial public offerings—can sustain the momentum.On Saturday, the central bank issued guidelines on its website to regulate fast-growing Internet finance as part of efforts to address risks exposed by the recent stock market turmoil.

Informal lending channels such as peer-to-peer lending, which directly connects borrowers and lenders, have played a major role pumping up the market—but also exacerbating its declines. Analysts expect more regulation could curb gains in the short term.

“Last week, many websites completely or partly closed down their informal financing business for stock investment,” wrote Vincent Chan, analyst at Credit Suisse in a research note Monday. “The scale of informal financing may have already dropped by at least 20%. A continuous decline could be seen in the future months.”

Some 572 firms in Shanghai and Shenzhen remain halted for trading, roughly 19% of the market by number of firms, according to FactSet. Those shares that have resumed trading have helped unlock liquidity for investors who were hard-pressed to sell for cash.

Some attribute the halts to a rising number of so-called stock-pledge loans, in addition to companies opting to suspend shares that were rapidly losing value. Since 2012, controlling shareholders started to use their holdings as collateral to borrow from brokers and banks. Given the selloff diminished the value of those pledges, “suspensions could be an alternative for these companies to delay the need to raise collateral,” analysts at HSBC Holdings PLC bank wrote in a research note.

The firm estimates the value of stock-pledge transactions surged to a record 1.5 trillion yuan ($241.5 billion) year-to-date from just 694 million in 2012.

Elsewhere, Australia’s S&P ASX 200 is flat and South Korea’s Kospi is down 0.1%. Japan’s market was closed for public holiday.

The euro traded at $1.0822 after hitting a near-two-month low of $1.8026 on Friday. Euro sentiment remains tenuous, though Germany’s Parliament on Friday backed a rescue for Greece and eurozone officials completed plans to provide the country with €7 billion ($7.58 billion) of bridge financing.

The U.S. dollar rose against several Asian currencies after the Federal Reserve kept alive hopes last week for raising interest rates this year. That has pushed some Asian currencies lower.

South Korea’s won hit a new two-year low against the dollar, continuing a slide that started in late April. The Singaporean dollar fell to a fresh three-month low against the U.S. dollar. The Japanese yen is at ¥124.14 compared with a previous close of ¥124.07.

Brent oil traded at $56.93 a barrel from $56.96 Friday in Asia.

In Hong Kong, brokerage Haitong Securities Co. said its first-half net profit and operating income more than tripled, thanks to a bull market in the January to June period. Shares were down 1.6% Monday.

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