NEW YORK (TheStreet) -- This week, the attention of most market participants will be on what action Congress takes in their sole week of session for the month of November. The most important item facing Congress is the looming expiration of the Bush tax cuts.
The uncertainty over the fate of the tax cuts, along with faster-than-expected inflation in China, stoking fears of a rate hike, and the ongoing debt problems in the eurozone, contributed to volatility last week. Stocks, as measured by the S&P 500, gave back 2.1% after gaining 3.6% in the prior week. Last week also saw two markets that lately have been immune to these considerations demonstrate higher volatility: Gold prices fell 1.8% after gaining 2.5% the week before (according to Bloomberg data). Emerging market stocks, measured by the MSCI Emerging Markets index, were down 3.0% after being up 4.6% in the prior week. The return of volatility to gold and emerging market stock prices has raised a question among some market participants: is the relentless climb pushing gold and emerging market stock prices into bubble territory? We do not think so. If they are bubbles, historically they still have a long way to inflate before they burst. Gold Prices As you can see in Chart 1, gold prices have tracked the classic bubble pattern but have yet to enter the parabolic stage where the bursting of the bubble and the ensuing sharp losses begin to become a risk. The investment bubbles of the past experienced far more inflating than what gold prices have experienced so far. The technology bubble of the 1990s (measured by the Nasdaq), the oil bubble of the late 1990s/early 2000s (measured by oil futures prices), and the housing bubble (measured by the S&P 500 Homebuilders Index) took 10 years and posted gains of about 1000% before they burst and quickly surrendered most of those gains. What could push gold prices into historical bubble territory? While rising central bank demand, higher mining costs, and demand for gold as a luxury and a savings vehicle from a rising middle class in China and India all help to support gold, the potential driver of a bubble would likely be driven by currency. Part of the rise in gold is due to the decline in the value of the dollar. As the dollar goes down the price of gold in dollars goes up. While gold has surged to an all time high over the past five months in dollar terms, gold denominated in euros remains below the levels reached five months ago. 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