Gold sank fast in Europe today, pulling back below $680 before suddenly rebounding to a fresh 9-month high above $688 as world stock markets fell on news of a 9.2% drop in Chinese equity prices.

The sell-off in stock markets starting early Tuesday may have forced fund investors to take profits in gold and cover their losses elsewhere. (It's a common enough practice – as this story explains...)

But as London stocks closed the day more than 2% lower, gold shot higher again.

Why the shock drop in Chinese equities? In the 12 months to Monday, the Shanghai & Shenzhen 300 Index had more than doubled. Today it lost $107.8 billion of its value amid the biggest one-day points drop in 10 years.

Emerging markets to the west began tumbling too as the sun came over the horizon. Russian commodity stocks have sold off...the Polish market has dropped hard...the JSE in South Africa's lost nearly 2% so far...and the Czech market in Prague has dropped 1.4%.

"I wouldn't buy [emerging markets]," says Marc Faber, the Hong Kong-based voice of doom. "Something has changed in the financial market: It's the time to sell rallies rather than buy dips."

By 11am in London today, the MSCI Emerging Markets index stood 1.3% lower from last night. It had touched a record high last Thursday, rising by nearly a fifth in 12 months.

But that's nothing. The Chinese stock market had jumped by one fifth during the last nine weeks alone!

Today's sudden collapse in the Shanghai & Shenzen has spooked bond markets, too. The cost of buying insurance on corporate bonds in Europe today jumped faster than any time in the last 5 months.

Credit-default swaps rose 0.6% according to J.P.Morgan Chase & Co. The cost of CDS had sunk to a record low only last Thursday.

The immediate cause of today plunge in China's Shanghai & Shenzen stock index appears to have been political. "China's highest ruling body, the State Council, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market," reports Bloomberg.

"The group will provide advice on regulations and policy explanations of the securities market."

Rumors of state meddling in the Chinese stock market have been gathering pace recently (click here to learn more...). And if a ban on illegal share offerings sounds familiar, stock market historians might recall what caused the South Sea Bubble to burst nearly 300 years ago.

The Bubble Act of 1720 included this same provision – against "illegal share offerings". It also caused a panic amongst over-geared investors.

New share issues were made illegal in the vain hope that all fresh investment cash would therefore pour into South Sea stock – the British government's favourite pyramid scheme.

But alas! Trying to control the mania simply caused the Bubble to burst instead. And now China's bureaucrats must relearn the lessons taught to Westminster in 1720.

To read more history and forecasts for the global finance markets today, click here...