A golden chance to check global financial health

The recent plunge in gold prices is a reminder of how little we know about the impact that ultra-low interest rates can have on the global financial system. If the world economy, bitterly shaken by the 2008 global financial crisis, is to avoid another crisis, policymakers across the world better open their eyes to the potential dangers of keeping interest rates too low for too long.

Just when the international community breathed a sigh of relief over European Union leaders striking a deal on Greece and Chinese policymakers arresting the sharp fall of the domestic stock market, gold prices suddenly plunged to a five-year-low on July 20, casting a cloud of uncertainty over global growth prospects.

The decline in gold prices began soon after it reached a record peak of almost $2,000 an ounce in September 2011. Yet had it not been for the dramatic sell-off within a matter of minutes on July 20, few would have noticed that gold had already shed half the gains from its 12-year high in 2011. It was reported that more than 33 tons of gold, worth about $1.3 billion, were traded in 2 minutes in Shanghai, although the exact reason for such aggressive selling remains unclear.