The prices of risky assets began increasing in June of this year & continued until at least mid-September. Much of the rise in equity indexes can be explained by the flood of liquidity courtesy of the major central banks, especially the FED & the ECB acting on behalf of the euro-zone. (Dare anyone say, “bubble”!?!)
And so it is that institutional investors took the “sucker bet” offered by central bankers & stocked up on risky assets. Meanwhile, the Fed seems to be reducing the size of its own balance sheet, pursuing a stealth “exit strategy” by selling off over-valued assets from its portfolio to private buyers that now hold depreciating securities.
Meanwhile, many central banks are buying gold at historical rates. According to Thomson Reuters GFMS, central banks may increase their gold purchases to 493 metric tons this year as they already bought 273 tons in first 1/2 of 2012, up by 7.9% or 457 tons last year. This was 2nd time there has been an increase (1988 & 2010) & largest buy since 1964 such that the net addition to their gold stocks since 4th quarter of 2008 has been 1,290 tons.
And so, central bankers are offloading junk assets to private investors that believe that the floodgates of artificially-cheap money will flow unabated. And the same central bankers pile into gold as their handiwork causes the simultaneous collapse of paper currencies.
None of this can end pretty….