Leverage, margin, carry trade, money supply and creation..I got up this morning and watched gold and silver explode!.. silver through $21 and gold through resistance around $1320/1325.. Just thinking about what has been happening to the broad markets over the last 5 years and what that means in terms of money available to pump into markets .. using the S&P as a guide it has more than doubled in that period of time..
The life of investors, traders, funds etc has completely changed over the last 20 years or so as in a nutshell unbelievable amounts of credit are now available to all and sundry..
My thinking is like this: I have a margin account.. not because I want to use margin but because it has it's advantages like for eg I don't have to wait for settlement if I want to make a transfer..
To make my point here is what could have been done by someone investing in the S&P over the last 5 years.. Lets start with $10,000 cash and make it into $30,000 using margin.. then buy a X 2 leveraged ETF.. the double that the S&P made becomes a treble and the $30K becomes $90K so our guy has made $60K with his original $10K.. but wait that not the half of it.. as the investment rises MORE CREDIT becomes available so more money can be pumped into the investment.. that $60K gain can be increased by a huge amount.. theoretically at least Joe Bloggs could have made a million$ from $10K over a 5 year period on an investment that just doubled!! It's true.. that's the way it works in the Stock Market Casino that we have today..
Now add to that that the example above is what is available to the average man in the street.. God knows what the big traders, banks etc can do with todays unlimited credit / leverage / margin!! the mind boggles!
There is a reason I'm harping on about this.. these thoughts came to me while I was watching gold and silver this morning.. As we know 99% of traders etc see gold and silver as just another trading vehicle.. and like our imaginary trader above many of them have been making a lot of money on stocks.. and so they have created exponential growth to their credit and margin capabilities..
How much money does it take to push the S&P from 10,000 to 20,000? the zeros go off the edge of the page right!.. but then add all the credit and margin that that money creates.. ok it is too much for the brain to get it's head around (lol).. right?
Where is all that money going to go? (ok its not really money) but when you are playing scrabble you only need bits of paper.. (now numbers on a screen)
When the leveraged credit mob sees PMs breaking out what do you think they are going to do? and does it not make sense that in todays (insane) world where money can be bought very cheap and leveraged to obscene levels that our dear old PMs could just go freaking nuts a lot quicker than we expect?
Just some (probably a bit mad) thoughts over my morning coffee ;)
Good day to you all!