Are The Current Market Conditions Indicating A Bigger Bubble Formation?

I really wonder how can the world forget the plight of "Enron", it's investors and shareholders so early. It's not so long when the whole governing and financial system of USA was manipulating the share prices of Enron. That formed the bubble in the share markets of many countries and that bubble eventually bursted when Enron filed for bankruptcy. That was an example of big accounting error created very deliberately by the top managemet of Enron with the help of many top government officials of USA like Satyam did in India.

Once again markets are showing the bullish trend, reason being lot of liquidity in equity and commodity market which entered through the bail out packages declared in recent times to overcome deep recession, .Global markets have been on a tear since the start of March 2009. While emerging markets are up anywhere between 50% and 120%, western markets like the US have also raked in robust gains - all this on the basis of rising investor expectation that the world economy is finally moving towards safety and growth.

Amidst all this, gold remains an anomaly given that the metal generally has an inverse relationship with the stockmarkets. When stocks are on a downward slope, gold gains strength and when stocks are going great guns, the metal isn't in much demand.



But this time it seems different. As you can see from the chart below that indicates the stocks to gold ratio (i.e., number of units of the US Dow Jones index each ounce of gold can buy), it hasn't moved much since the rally began in March this year.

                               *Stocks are representative of the US Dow Jones Industrial Index



So is there some hidden danger that investors seem to fear (as they seem to be buying the safe haven gold) even when they are buying equities lock stock and barrel? There is one, at least if one were to believe Alice Schroeder, the author of "The Snowball: Warren Buffett and the Business of Life" and a senior adviser to Morgan Stanley.

Ms. Schroeder expects the danger of a sudden currency (read, the US dollar) depreciation lurking around the corner, which can lead to a mega-inflation. And this is what she believes will keep gold prices strong. As she writes on Bloomberg, "Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance. I haven't, so far, but the temptation is rising by the day."

 

Moreover, The Chinese authorities have had enough of it perhaps. In what could be called a potentially game changing event, a leading news portal has reported that the Chinese Government has made an announcement that further investment in industries such as steel, aluminium, cement and other industries be stopped with immediate effect. Apparently, the Chinese government seems to be concerned with the reports floating around that the ongoing investment boom in the Chinese manufacturing sector is leading to capacity glut and price wars and if allowed to go unchecked, it could set the stage for a potentially nasty outcome.



It should be noted that in order to support growth in the aftermath of the financial crisis, the Chinese Government had asked its banks to lend freely to the manufacturing sector. But the move was starting to have unintended consequences in the form of excessive investment and hence, the decision to rein in expansion in certain industries. Indeed, if the Chinese do get it right, one potential bubble that was threatening to derail global economic recovery would have been nipped in the bud.