Gold Rising on Insolvency Risk, not Inflation...

In one way, gold's surge to $1150 simply reflects the tidal wave of excess liquidity that is lifting all asset prices from US junk bonds to the most obscure emerging market indices. That unprecedented money supply growth, while largely insulated from the real economy thus far by excess reserve accumulation by commercial banks in most of the developed world, has nonetheless very directly buoyed financial assets. Central banks from the Fed to the BOE have gone into the markets and bid for government bonds and investment grade corporate paper with newly created 'virtual' money, and the cash finding its way into institutional balance sheets as a result is then being reinvested into riskier assets like equities and high yield debt. In China, the 29% annualized M2 growth has flushed directly through the banking system (where lending is only now slowing from an annualized rate over 30%) directly stimulating both the real and financial sectors. Constrained physical supply growth is another factor amid an underweight position at Asian central banks, which have built up vast piles of paper assets while allowing their share of gold to slide in recent years. India's IMF purchase, which was a key trigger for this latest rally, was inspired by this rebalancing, having seen gold drop to just 3.5% of total reserves.

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