The practice of rehypothecation is centuries old. It has been used to create “free” money supply and in recent times the Chinese have become rather fond of commodity funding deals in an attempt to leverage deals and grow their economy.
The model works, at least in theory, and while all is well one can extend the daisy chain, seemingly for ever…
The universe provides infinitely after all, doesn’t it? This is basic pop quantum physics. The difficulty arises in the very moment a link weakens and defaults occur. Just as sure as the Lord provided apples, defaults will occur, if only when the evolutionary rubber band gets stretched to extremes. This is what appears to have occurred in China recently: The boys had to go out and buy the physical gold to cover.
Rehypothecation is a form of pyramiding, in more simplistic terms. We all know that pyramiding is illegal. However, not so with rehypothecation: In America the laws have been tightened, while in Europe and other parts of the world the laws are more relaxed.
Punters love gold and silver
The Chinese have been buyers throughout 2013 and again this year, if only to cover the defaults in the daisy chain,, giving gold and silver a temporary boost. The metals carry a very strong morphogenetic field, that has been established throughout financial history. Morphegenitc fields are the energy clowds formed through collective belief systems. They remain active attracking unaware people into their fields the stronger they get. Viewed as a solid asset that will carry one through times of uncertainty, savvy investors have been buying gold and silver steadily in recent years. By contrast to the futures price, the physical demand and price and gold and silver has held steadily and continues to do so.
The big question though is this:
Has the recent pop in the gold and silver price altered the chart structure enough to make us establish swing positions for the longer term?
I have shown a weekly chart of SLV the silver ETF on several television interviews in the UK. To me the chart structure is very clean, showing a clear wave count and subsequent break to the upside. Alas, as an Elliott wave buff I am also mindful of the fact that the Elliott wave count is calling for a big sell off once the E wave up is in place. This remains true as long as the wave count remains in tact and does not morph into something else.
So, what is going on here? To answer the question we have to look at the psychology that underlies every market move. Macro trends remain in tact for far longer than most traders and investors realise. Belief is everything and when a collective belief has been around for centuries it is hard to change its dynamics, even if there is evidence to the opposite. Just remember the issues Galileo was facing the 17th century.
Normalcy bias is a huge handicap that investors and traders alike must recognize in themselves and need to over come. We all fall prey to it: We do not like change, hence we have great difficulty adjusting to a change in trend, and even greater difficulty coming to terms with the fact that some old established laws are not working any more in an environment of massive global paradigm shifts.
Re-inventing the way the macro financial system works is a tall order
While anyone who has foresight and awareness will be able to see that the system is rife to collapse, don’t let your opinions influence what you see on your charts.
The fear of uncertainty can be felt in the markets. It reflects the nervousness of the punters who worry about securing their longer term financial future.
Fear breeds bias and contraction. If you make trading and investment decisions from a place of fear instead of from awareness you cannot see the bigger picture.
The financial markets are nothing more than a game of chess. Each move reveals another piece of the puzzle while also presenting infinite possibilities, because you cannot determine how beliefs and moods of the other players change from one moment to the next.
It is my personal opinion that we will be seeing both gold and silver at much higher prices
When that is going to happen is hard to tell. In a world of continuing weakness in the European banking system, where countries like China are repeating the mistakes of their western Gurus, displaying a stunning lack of awareness of financial dynamics, anything is possible.
I have said it before, and I will say it again: The world is changing, it is changing faster than many are willing to admit, yet the change is also slower to manifest physically as a new paradigm off which to make longer term financial decisions, is still in the early stages of emergence.
In a transition period like the one we are finding ourselves in right now, where old belief structures and macro systems are crumbling, nimbleness and awareness are key, while over interpretation of what the markets might or might not be doing is a waste of your energy and will be holding you back.
