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The Confidence Game

InvestorEducation / Trader Psychology Apr 09, 2013 - 11:03 AM GMT

By: David_Petch

InvestorEducation

Last night I was staring at a computer screen with numerous bullet points for this article and was wondering how to weave them together and what to call it. After sleeping on it, the perfect title for this came to me...”The Confidence Game”. In human psychology, there are many different levels of human emotion or behaviour, from which other forms of behaviours stem. This might seem like a pointless exercise, but follow the flow chart below with a background thought about relating this to money, the banking system and precious metals.




This is a really simplified diagram for a breakdown of human psychology and inner components, but is described as follows. The Reptilian Brain is the most basis level of the brain, but is governed by perceived or actual threats. This is where mass psychology can occur with panics in stock markets or runs on banks. Breathing, heart pumping etc...all basic life requirements are controlled by this level of the brain.

The next level is the limbic system, which is the center for sensory control and processing. This is where long-term memories lie, which is also tied to the creation of emotional markers...the ex-wife or ex-husband, that passionate kiss, foods linked to food poisoning, dislike for certain groups, trust for certain groups etc.

The final level of the brain is the neocortex, which is where language (speech and writing) and the realm of logic (all of the items described in the box above) are found. Although this section is used most of the time, periods of panic often see this area of the brain not used at all.

From an awakened state, there is either a “Peaceful” or “Perceived or immediate threat” state of mind. At present, the broad stock market appears to be in a state of peace. Although there are problems in Europe, the fight or flight response has not yet been triggered. There has been an associated “trust” within the banking sector, which fundamentally is a response to a trust in the currency being used. I am sure this is not the case for people with money in Cyprus or former MF Global, but again, it does not represent the majority view of the global populous at present.

With trust comes confidence that one can deposit money and take it out next week or that it will most likely buy a loaf of bread next week without requiring 1000x that amount or more (in the event of hyperinflation). With overall trust within a system, there will be peace, less conflicts, social order and  day to day living as people interact to build society as whole.

When governments print money to essentially pay their bills, there is more money in the system chasing the same number of goods, so the result is higher prices. The entire fractional reserve banking system can naturally lead to a slow expansion in the money supply, but when the money printing is handed over to government, levels can dramatically increase in a relatively short period of time. Poor handling of finances at the level of government quickly spreads, which then starts to cause a breakdown in the system which will ultimately cause a challenge of the belief system.

This is the really critical point that everyone understands.... “A breakdown in the system will ultimately cause a challenge of the belief system”. Everyone has friendships with people they trust, participates in organizations because “they believe” in its benefits. People go to church because “they believe”. John Lennon said it best that “Everybody has to believe in something”.

When the level of questioning a belief system on the level of a society occurs, there is a tipping point a major shift in public sentiment  that triggers a fight or flight response. The fight response can be futile just as much as the flight response, depending upon given circumstances but when the masses are running, anyone in the way gets trampled.

For this reason, it is very important to try and engage the neocortex part of the brain and think logically. If anyone is engaging in this level of reasoning, then minimal funds should be kept of of the banking system, own gold and silver bullion and yes, even mining companies. When people lose trust, they lose confidence, so when confidence is lost in the banking system, eventually a fight or flight response will occur.

This flight could be money leaving banks or a flight into tangible assets such as gold, silver, mining stocks other currencies etc. When this panic sets in, those that were intelligent enough to utilize their neocortex abilities will be rewarded. There will be a flip side to this however, as those participating in the ownership of gold, silver etc. will at some point have the belief that they can make more money and then become complacent with thought or actions when their prices approach their peak. As all other bubbles, the prices of gold and silver will reach some conclusion at high levels that will have nowhere to go but down. And then again, people will panic and fight or flight mentality kicks in.

It is so important to keep a logical perspective on life overall and to always challenge the belief model on a rational basis so that the neocortex is not blocked. By keeping this thought in mind, it allows one to mostly bypass the fight or flight response and to logically follow the paths presented by markets or anything else.

The Contracting Fibonacci Spiral seen in the broad stock market indices is a direct reflection of how the US Dollar has evolved from 1932 until present, which in turn is guiding the mass of human psychology down a guided path that can allow somewhat accurate glimpses into what the given mood of a populous should be experiencing at a particular point in time.

Since this theory is at its infancy, there is not enough research that has been conducted to fill in a lot of the holes to link human behaviour at a certain part of the cycle and how reproducible this has been seen throughout history.

The illustration presented in this article is a further expansion of the article from the April 2013 Issue of Stocks and Commodities titled “The Contracting Fibonacci Spiral”. The hard cover issue does not hit the news stands until April 1st, so I have yet to secure a copy for myself. Be very aware of surrounding news, because although random, there is order in the chaos and it is leading to a huge surprise to the downside sometime between October 2013 and no later than February 2014. Most of 2014 is going to be down, based upon the CFS, which in turn should be followed by a move similar to that from 2002 until 2008 (6 years) and 2009 until 2013 (4 years). The year 2013 represents the 5 year time post for the CFS cycle, with the next one occurring in 2016. This cycle is a true reflection of the channelling of mass psychology through the broad stock market indices of the United States with the point of origin linked to how the US dollar has been treated as a currency.

In a sense, we are experiencing a living experiment of evolution within the context of  human psychology. If people as a whole can learn from this experience we are trapped in (there is no way to stop this cycle unless the governments outright were to remove democracy and seize all assets), then future generations can have societies constructed so that there is peace and prevention of future internal conflicts.

By David Petch

http://www.treasurechests.info

I generally try to write at least one editorial per week, although typically not as long as this one. At www.treasurechests.info , once per week (with updates if required), I track the Amex Gold BUGS Index, AMEX Oil Index, US Dollar Index, 10 Year US Treasury Index and the S&P 500 Index using various forms of technical analysis, including Elliott Wave. Captain Hook the site proprietor writes 2-3 articles per week on the “big picture” by tying in recent market action with numerous index ratios, money supply, COT positions etc. We also cover some 60 plus stocks in the precious metals, energy and base metals categories (with a focus on stocks around our provinces).

With the above being just one example of how we go about identifying value for investors, if this is the kind of analysis you are looking for we invite you to visit our site and discover more about how our service can further aid in achieving your financial goals. In this regard, whether it's top down macro-analysis designed to assist in opinion shaping and investment policy, or analysis on specific opportunities in the precious metals and energy sectors believed to possess exceptional value, like mindedly at Treasure Chests we in turn strive to provide the best value possible. So again, pay us a visit and discover why a small investment on your part could pay you handsome rewards in the not too distant future.

And of course if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line . We very much enjoy hearing from you on these items.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities as we are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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