Threat of a financial crash looms large

The August haze that settled over financial markets and a further hike in technology share prices may prove to have been an Indian summer with a stormy autumn ahead.

The gold price is one classic indicator that all is not well beneath the surface. If the US economy is in recovery mode, why is the gold price back to February, pre-war levels of $375? Somebody is buying the yellow metal as a safe haven, its usual role in troubled financial markets.

Any chartist worth his salt will tell you that the markets are not looking good for September and October from a technical viewpoint. Share prices have now run up to unsustainable valuations and are ripe for a correction.

So who is selling? Unfortunately it's the directors of the companies in the indexes who are the main sellers of shares at the moment. This classic sign of an impending market crash has been largely overlooked by most commentators.

The men and women who run the top companies know that they can not deliver the profits to sustain current valuations.

What then could trigger a financial crash? It could be a major insolvency, perhaps a hedge fund collapse. Or maybe the oil price will suddenly bulge back to $40 due to a combination of unexpected events.

Market crashes are usually triggered by unforeseen event so that makes precise forecasting difficult to say the least. All that can be said with reasonable certainty is that if you hold a position in the financial markets this is the moment to close it before it closes you.

Many experts will argue the reverse and tell you that markets have just begun to take-off and that only a fool would sell right now. But ask yourself, how much upside potential can you really see? Where are the profits coming from? Do you know more than the people who run the top companies?

Any stock market crash will be further compounded by a real estate implosion in many Western markets. This summer I visited a London Docklands one-bed apartment selling for $550,000 offering a gross rental yield of 3% and that is an unsustainable bubble price if ever there was one.

For the record, in the UK Gerald Ronson and Paul Reichmann are independently pursuing real estate takeover deals, for Countryside Properties and Canary Wharf respectively. And both these gentleman lost their fortunes in the real estate collapse of the early 1990s. Is this a case of déjà vu?

Conversely investors in Arabia are enjoying a ball thanks to strong oil prices and the prospects on an imminent investment boom in Iraq. Moreover, if Western markets fall, even more money will come home to Arabia fuelling local real estate and stock markets.