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Why do prices keep changing

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Sieben posted on Wed, Mar 9 2011 8:21 PM

No. I'm not trying to be a wise guy. I've been kind of unnerved that silver has been steadily increasing. A price change implies that the market was wrong about the previous price. So the market's been systematically wrong for like the last 2 years.

How does such error persist?

Obviously there are asymmetries in the market leading to this outcome, but people who undervalue silver sell it, and are no longer in the market. But I don't believe this can really persist for TWO years because anyone who valued silver (correctly) at $35/oz would have just bought all the silver they could below that price.

I'm just confused. EMH isn't working. I don't buy Keyne's line that "Markets can remain irrational far longer than you or I can remain solvent". Hurr durr financial groups with very deep pockets exist partially for this reason.

Thoughts? Why can't we iron out the price of silver? ><
 

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A price change implies that the market was wrong about the previous price.

Why is this necessarily so?  Why couldn't the underlying fundamental factors have changed?

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Have they? I'm thinking its unlikely that they would consistently change in an unpredictable way. Like if silver mines were collapsing in argentina, that might alter the price if no one predicted it, but if silver mines keep collapsing every month you'd think it would have been predicted and bid up to the expected price.

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I don't know the exact causes of changes in commodity prices, although I think it's worth considering that different commodity prices have been changing for different reasons.  It's also worth considering that commodity prices as a stock, or as a future, tend to be volatile.  Likewise, an important underlying fundamental, or aggregate nominal demand (thanks to an increasing money supply), has been dramatically changing over the past two years.  For many commodities, the supply factor has also been changing, in large part due to capital market restrictions, subsidizations, and other forms of government interventions (this is true, for example, of food prices).

Market prices have been fluctuating because of dramatic changes in the underlying fundamentals, not because of some "natural", or uninfluenced, entrepreneurial error.

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filc replied on Wed, Mar 9 2011 8:56 PM

I don't understand the premise. The concept of a price not changing seems foreign to me. The whole concept of exchange fundamentally implies a state of change.

Am I missing something here?

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Has silver increased in price, or has the dollar decreased in price?

Also, great to see you around Sieben.  Congrats on your UT placement.

"When you're young you worry about people stealing your ideas, when you're old you worry that they won't." - David Friedman
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AJ replied on Wed, Mar 9 2011 9:05 PM

Isn't the steady rise of silver just the result of two magic ingredients:

1) a steady driving factor (money printing)

2) most people failing to recognize that as the driving factor

? Aren't people systematically wrong because they are guided by completely bogus economic theories? I hear Ben Bernanke has been consistently wrong in almost all of his predictions for several years. 

I thought that was what investment is supposed to be about: finding the driving factors that create big trends before others catch on to them.

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Answered (Not Verified) DD5 replied on Wed, Mar 9 2011 9:05 PM
Suggested by filc

The notion of a wrong or correct price is based on a double fallacy:

1.  That money prices are a measure of value.

2.  That value is intrinsic and can be determined objectively.

 

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The notion of a wrong or correct price is based on a double fallacy:

1.  That money prices are a measure of value.

2.  That value is intrinsic and can be determined objectively.

THIS.

Clayton -

http://voluntaryistreader.wordpress.com
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JMFC:
For many commodities, the supply factor has also been changing, in large part due to capital market restrictions, subsidizations, and other forms of government interventions (this is true, for example, of food prices).
These would only cause a change in price if price if the market failed to predict them. As far as I know, there hasn't been a sustained trickle of unpredicted changes to the market all affecting silver positively.

If there has, I'm really really interested in what about those changes makes then unpredictable. I mean markets are pretty reasonable even in the face of natural disasters/oil price... But maybe prices are inherently unstable because each individual forecast is actually a range of prices. For example, if a hurricane hits oil is $200, else $100. The expected price is $110 but it won't ever be that, and you can't trade it at both values simultaneously. Well actually you *could* stipulate it via options contracts. I wouldn't be surprised if this is normally done.

Digression. This regime would not result in systematic underprediction of commodity prices.

Liberty Student:
Has silver increased in price, or has the dollar decreased in price?
Don't know. That's another conundrum :P What I'm worried about is why the marginal buyers/sellers systematically underpredict silver prices. You'd think they'd eventually figure out that the fed prints money and factor that into their decision.

Liberty Student:
Also, great to see you around Sieben.  Congrats on your UT placement.
Thanks! I'm real excited. Most of my time has actually been taken up by Debate.org. You'll be pleased to know that Anarcho-Capitalists dominate the debates/forums.

AJ:

2) most people failing to recognize that as the driving factor

? Aren't people systematically wrong because they are guided by completely bogus economic theories? I hear Ben Bernanke has been consistently wrong in almost all of his predictions for several years. 

I thought that was what investment is supposed to be about: finding the driving factors that create big trends before others catch on to them.

Well the idea is that bogus economic theories won't persist on markets because you'll consistently get the wrong answer. But even if only a minority of entrepreneurs guessed (correctly) that silver was under-valued, they'd just buy up all the silver from the rest of the market (pending capital constraints), and then the price would be bid up accordingly and stay around there.

DD5:

The notion of a wrong or correct price is based on a double fallacy:

1.  That money prices are a measure of value.

2.  That value is intrinsic and can be determined objectively.

I'm not talking about value, objective or otherwise. I'm talking about price. Price is a complex relationship between supply/demand, both of which may change. But the idea is that the market rewards actors who correctly forecast this relationship, systematically weeding out people who misjudge market conditions. So why are market conditions systematically misjudged in one direction? Random error would show a normally distributed fluctuation, but silver has quintupled price since 2003.

Thanks for your responses everyone!

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Sieben:
A price change implies that the market was wrong about the previous price.

Wrong.  Sometimes value changes.  In fact, a lot of time value changes.

 

I'm just confused. EMH isn't working. I don't buy Keyne's line that "Markets can remain irrational far longer than you or I can remain solvent". Hurr durr financial groups with very deep pockets exist partially for this reason.

This is another part of your problem.  EMH is more of a way of looking at the world than anything else.  It is basically a tautology for most of its proponants.  Bob Murphy has covered this quite extensively actually...

My Response to John Cochrane (Who Was Responding to Krugman)

Economists Can Be Hilarious

Ten Things I Hate About the Efficient Markets Hypothesis

Following the Efficient-Markets Hypothesis into Absurdity

Bursting Eugene Fama's Bubble

 

And here's a nice one from Stefan Karlsson:

Of Course Investors Can Beat the Market

 

Thoughts? Why can't we iron out the price of silver?

Again, prices change many times because underlying factors change.  That's the way markets work.  But as for silver, you have to throw in this too.
 

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Answered (Not Verified) filc replied on Wed, Mar 9 2011 10:02 PM
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Sieben:
So why are market conditions systematically misjudged in one direction? Random error would show a normally distributed fluctuation, but silver has quintupled price since 2003.

Even so th at silver's rise was great, why does that imply the historical price was ever wrong? I still think your misunderstanding the concept of a price. I think all the literature about entrepreneur's finding market discrepencies has confused. Prices are niether wrong nor right. The price that was used to demand a certain amount of silver in 2003 was appropriate for the time.

Things have changed. The money supply has expended at a higher rate then it has ever in the US history. Silver's industrial use's have exponentially grown since 2000. New investment models like SLV and silver's linking back as a type of currency. There are countless reasons, all of which I cannot name, that are the cause for Silver's climb. 

By what logic can we say that it was ever in error? How is something priced in error?

Sieben:
Price is a complex relationship between supply/demand,

But explaining it in this way understates the complexity. Demand ofcoarse implies changes in valuation.

 

Edit, the drawing is something I made. I hope it makes sense.

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Sieben replied on Wed, Mar 9 2011 10:13 PM

JJ:
This is another part of your problem.  EMH is more of a way of looking at the world than anything else.  It is basically a tautology for most of its proponants.  Bob Murphy has covered this quite extensively actually...
I'm not subscribing to EMH. There are all sorts of reasons why its wrong. I'm asking why, in this case, its wrong. Its an educational starting point.

JJ:
Again, prices change many times because underlying factors change.  That's the way markets work.  But as for silver, you have to throw in this too.
I know things change. I'm asking why the changes go systematically unpredicted in one direction.

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filc replied on Wed, Mar 9 2011 10:18 PM

Sieben:
I know things change. I'm asking why the changes go systematically unpredicted in one direction.

Perhaps, in your entrepreneurial spirit, you are noticing a change and/or trend in human behavior/preference? Perhaps your noticing an accounting change(Nominal increase of money). Perhaps your noticing a long-term business trend(These things can last decades). Perhaps your noticing a combination of all 3? These are all good questions but none of them imply that price was wrong or incorrect. These questions don't imply that past actions taken were done so in error.

Identifying trends(Systematic and consistent changes as you state) is a very normal entrepreneurial activity. :)

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Sieben replied on Wed, Mar 9 2011 10:21 PM

filc:

Identifying trends(Systematic and consistent changes as you state) is a very normal entrepreneurial activity. :)

I know. But if prices trended you could just predict the trend and win. Are you telling me there's an easy way to autowin on the silver market?

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