The demand structure is changing heavily. 2003 nearly nobody thought a US-Dollar break down is near or even possible. Therefore mainly industrial demand had an effect on its price. Now this has changed. People like filc prove this. And as Silver lost a lot of value when it was demonetized, it now is gaining this monetary value back. Since the Silver market is very small, this can result in heavy price changes, given the amount of savings that might seek security. How could the whole Market expect that situation already in 2003 to adjust the price for this already at that time?
Sieben,
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.
I’m not sure if I’m understanding what you’re trying to say. Are you saying that if the market predicted changes in underlying factors then price wouldn’t change? If so, I don’t think this makes much sense. Price, elementarily speaking, is derived by the supply of the good and the nominal aggregate demand for it. I mean, this isn’t a very accurate picture of the factors behind price formation, but it goes to show that changes in underlying factors will cause changes in price, even if these factors are predicted. If the factors are predicted then the change in price will occur instantaneously to the market clearing price.
If there has, I’m really really interested in what about those changes makes then unpredictable.
I think the discussion has tended towards this point, but you have to consider the role of uncertainty. The role of the entrepreneur is to predict these changes, or at least form investment decisions in such a way that he will be able to garner a profit under future conditions (whenever that future may be).
A price change implies that the market was wrong about the previous price.
A price change implies that people are trading. The price of silver moves up to quell buying.
There is nothing easy about speculation.
I am pleased, and I expected no less from you.
There is nothing easy about speculation.
Of cause not, you certainly know the failure rate.
I’m asking why the changes go systematically unpredicted in one direction.
A trader, not an investor, normally buys because he wants to sell at higher price. Therefore he has to make a subjective prediction for himself.
If he has identified a beginning trend correctly, why should he leave before price has reached his subjective target and he has not seen a subjective sign that the trend might end. More traders jump on the trend, when it stalls. They also predict a higher price for themselves.
The trend for silver began around Jan 2009, but I don’t trade silver, I’m not a specialist for these commodities.
I already said errors are a persistent feature of markets. But the errors are all going in one direction (underestimation). Why?
No I don’t mean market failure in the technical sense. Specifically the current silver price represents the judgements of marginal buyers/sellers. But since silver is always increasing very very quickly, being a marginal seller has repeatedly and persistently been a bad strategy. Why does it continue to be adopted?
I think that future possible uses of silver are factored into the current price. But let’s say that a new unpredicted use for silver comes about. The price of silver adjusts. Okay done. No persistent one-sided change.
If people in 2003 knew that silver would be $35/oz in 2011, it would probably by selling for $35/(1+d)^t - its discounted price. Like if I knew silver would be $50 a year from now, I’d pay up to $45/oz to get my hands on it.
So you can see how having knowledge causes everyone to quickly adjust their strategy to pre-emptively eliminate systematic profit opportunity.
Well I think as you get more information, the price adjusts accordingly. Once there’s no new information the price should level out. The constant and steady increase in price over a long period of time implies that marginal investors are constantly having to re-evaluate silver because their previous prognosis was wrong. Why are they always wrong over and over again in the same direction?
Agreed. But I don’t believe everyone would just get blindsided by changes in underlying factors over and over again, especially if they are all in the same direction.
I guess I thought it would take less than 7+ years for this to happen ><
I tried to think about it from my perspective. I don’t know if silver will go up. I’m not willing to buy or sell it because its in a good place right now, and imo could go either way from here. My forecast is totally unprofessional and I don’t know what I’m doing. I wouldn’t even know how to figure out what the “right” silver price would be. I guess it just has something to do with how much other people want it compared to other assets, which is really hard to figure out. Maybe its just an impossible problem? Maybe the precious metals markets is complicated by having millions of players? Amateurs can definitely screw with the price, and by definition they’re marginal buyers/sellers if they’re entering the market now because of the financial crisis.
shrug
Its still bugging me. “Investment” has been bugging me ever since I asked my dad why real estate would go up. He wanted to buy a house and I’m like WHY. The expected profit will already be built into its up front cost. No one will sell it to you at a loss just so you can make a gain.
The other day I saw a $20 on the ground but didn’t pick it up because if it were a real bill someone else would have snatched it already.
Silver has traditionally been the metal used to define a currency more so than gold.
Once currencies went away from silver (i.e., being defined as a certain weight of silver), silver has seen wild swings in value, even more so than gold. I believe a lot of this has to do with inflation of currency much more than anything else.
The value of silver has been pretty low in comparison to other commodities, not just currency, and so it has more ground to cover before its value peaks (peak meaning once its value decreases with respect to other commodities).
Two things seem to be happening as of late.
-
Currency inflation, which decreases the subjective value of money since it takes more to purchase the goods you want. Actually I should say accelerated currency inflation as Governments intervene to “solve” their economic crises.
-
Greater uncertainty than normal, which tends to increase the subjective value of other commodities - OR - Greater certainty that the currency bubble is about to explode.
So, if there is either uncertainty about what will happen (not all that uncommon in a market) or there is certainty that disaster is about to strike, then people may be acquiring silver as a fallback to get the goods they want later on. Some probably also see the relative value of silver being low, and are looking to make a fast buck on a speculative increase in value. Compared to gold, silver has the higher profitability in terms of investment.
My point is that there appear to be many different reasons why people would subjectively value silver over other commodities. Over a period of several years, this has the potential to cause a precipitous increase in the price of silver. But given silver’s volatility, it’s also likely to come crashing down once people begin to reappraise their situation.
The other point is to look at the price of silver in relation to other commodities, not just currency, to see if it’s really increasing as dramatically as it would seem from the financial pages, which tend to relate prices with currency (the dollar in particular).
Sieben,
Well I think as you get more information, the price adjusts accordingly. Once there’s no new information the price should level out. The constant and steady increase in price over a long period of time implies that marginal investors are constantly having to re-evaluate silver because their previous prognosis was wrong. Why are they always wrong over and over again in the same direction?
I’m still not sure why you assume that the underlying “information” is static, given, and/or unchanging. I think we’ve already discussed how the factors that influence price formation have constantly been changing. This, in fact, is one of the insights of disequilibrium schools of thought, such as the Austrian school (and some extreme arms of the Keynesian school, such as G.L.S. Shackle) — equilibrium is unattainable, since the underlying factors of price (or this ‘information’) is always changing.
Agreed. But I don’t believe everyone would just get blindsided by changes in underlying factors over and over again, especially if they are all in the same direction.
They actually aren’t always in the same direction. In the commodities market there is a general upward trend, but that general upward trend is marked by periodic increases and decreases in price. The commodities market is typically very volatile, because it’s a highly active market. Furthermore, even if the underlying changes did cause a constant increase in price, it doesn’t mean that speculators will be able to accurately speculate on the degree of these changes, or even on when these changes will occur. You cannot assume the factor of uncertainty out of entrepreneurship.
He wanted to buy a house and I’m like WHY. The expected profit will already be built into its up front cost. No one will sell it to you at a loss just so you can make a gain.
Again, the pivotal concept is: uncertainty. Maybe the seller does know that the house will be worth more in the future, and maybe he does factor this into his selling price, since he knows that your father will still be willing to buy it as long as the price your father expects in the future is higher than the price which the seller expects (or maybe the seller doesn’t care if your father makes a profit in the future; he’s not selling it at a loss just because it will garner a higher price in the future). Tackling with this uncertainty is the job of the entrepreneur, as he directs capital into avenues of investment.
I don’t actually know the success or failure rates. I am takling about the epistemic issues related to trying to predict the future from empirical data and historical trends.
In addition to what Jonathan said. The marginal investor also is not always the same person, its different people who are wrong over and over again..
But the “constant change” can itself be constant. If silver is always getting more scarce for some reason - I don’t know maybe a silver factory explodes every month - once you know that the price of silver gets bid up accordingly and stays there.
The task of entrepreneurs is to try and predict the constant change. To be sure they will always have errors, but they shouldn’t be systematic in one direction, because that implies that there’s a persistent profit opportunity no one’s taking advantage of.
I think daily fluctuations can be thrown out of the analysis because it just makes a tiny dent in my complaint. Marginal buyers have always been right because silver increases above the market rate of interest. The fact that there are daily fluctuations makes some marginal sellers right too, but only insofar as they buy low and sell high very quickly.
That’s just it. There’s always a catch. Maybe its uncertainty. Maybe its a difference in time preference. But that shouldn’t systematically cause the market to reward buyers, over and over again for decades and decades. People’s preferences get revealed and coordinated with physical reality.
Even if everything’s complicated and changing the market rewards people who can predict the change. Some people will overestimate, some will underestimate. I don’t see any plausible way for investors to systematically underestimate the market. But obviously its happening and I am confused.
Sieben,
But the “constant change” can itself be constant. If silver is always getting more scarce for some reason - I don’t know maybe a silver factory explodes every month - once you know that the price of silver gets bid up accordingly and stays there.
I don’t understand your point. Why is the degree at which the factors change the same each time the factors change? Where are these assumptions coming from? It’s exactly the volatility in the changes that may occur in the future which create the always present uncertainty in entrepreneurial decision making. There is no constancy, and it’s an error to assume that there is constancy in any way.
The task of entrepreneurs is to try and predict the constant change. To be sure they will always have errors, but they shouldn’t be systematic in one direction, because that implies that there’s a persistent profit opportunity no one’s taking advantage of.
No, the entrepreneur makes investment decisions in uncertain environments. He knows that the fundamentals change, and has to predict how they will change. This doesn’t imply constancy in the change itself.
I think daily fluctuations can be thrown out of the analysis because it just makes a tiny dent in my complaint. Marginal buyers have always been right because silver increases above the market rate of interest. The fact that there are daily fluctuations makes some marginal sellers right too, but only insofar as they buy low and sell high very quickly.
This doesn’t really address what you quoted.
That’s just it. There’s always a catch. Maybe its uncertainty. Maybe its a difference in time preference. But that shouldn’t systematically cause the market to reward buyers, over and over again for decades and decades. People’s preferences get revealed and coordinated with physical reality.
When you have a steady increase in the quantity of money in circulation then this does call for increasing prices of the goods the new money is bid towards.
Even if everything’s complicated and changing the market rewards people who can predict the change. Some people will overestimate, some will underestimate. I don’t see any plausible way for investors to systematically underestimate the market.
Because an entrepreneur doesn’t know where the price of silver will be in thirty years. It could be that six months from now the Federal Reserve decides to tighten the money supply and the price of these commodities will suddenly fall. It could be that in ten years the dollar will face hyperinflation. Entrepreneurs are not omniscient, and the changing factors are not always predictable, which is why market prices don’t change perfectly.
So you’d say that there’s constantly not constance. What you really mean to say is that there’s nothing economics can say about the price behaviour of goods over time. Yeah I agree.
So there’s a price. There’s a change in the price. There’s a change in the change of the price. Etc. Entrepreneurs are supposed to sort it out in a way that eliminates profit opportunity. Even if they’re all just blindly guessing, there’s an automatic weed-out function of the market. And even if there weren’t, entrepreneur’s guesses wouldn’t systematically fall all on to one side.
I guess my problem is that you’re explaining how mistakes get made, not why they’re all routinely and perpetually underpredicting.
I’m choosing to ignore what you quoted because it doesn’t change the fact that buying has been a persistently profitable strategy (month to month).
This might do it actually. Could it be that even though the increase in silver price is predictable because of inflation, we only reach it once the new money enters circulation?
I know all this. Regime uncertainty etc. But you can estimate regime uncertainty. Its hard but the market will reward actors who get their forecasts correct.
Even still, there’s no reason for entrepreneurs to always underestimate the factors increasing prices.
I don’t actually know the success or failure rates.
About 80% to 90% of all traders fail within the first 5 years of trading.
After reading all comments in this thread I conclude, it is not about trading. I got a wrong impression from the title line.
Here http://www.marketoracle.co.uk/Article26826.html
is a possibility, how a trader might make a prediction for hinself. Like in an business, he has not to be absolutely right. It suffices to be probable right.
Sieben,
So there’s a price. There’s a change in the price. There’s a change in the change of the price. Etc. Entrepreneurs are supposed to sort it out in a way that eliminates profit opportunity. Even if they’re all just blindly guessing, there’s an automatic weed-out function of the market. And even if there weren’t, entrepreneur’s guesses wouldn’t systematically fall all on to one side.
I guess my problem is that you’re explaining how mistakes get made, not why they’re all routinely and perpetually underpredicting.
I’m not talking about making mistakes. I’m talking about the causes of changes in price, and the entrepreneur’s role related to these changes and the uncertainty that surrounds the future. I’m still not sure why you think entrepreneurs are making “mistakes”. The best way to model it, although not entirely accurate, is in a dynamic equilibrium model, where over time span x the underlying factors cause a change from equilibrium price P1 to P2. If the underlying factors remain unchanged then real prices will tend towards the new equilibrium. What happens, though, is that suddenly the equilibrium price changes to P3 and it does this on a continuous basis, so that equilibrium just does not become attainable, because the underlying factors are always changing.
It’s not about “underpredicting”. It’s about having the underlying causal factorsbehind price formation change again once you’ve responded to/predicted the last change.
I’m choosing to ignore what you quoted because it doesn’t change the fact that buying has been a persistently profitable strategy (month to month).
I’m not sure why this matters. The only thing that this means is that the underlying fundamentals are changing in such a way that prices are rising. An obvious causal factor could be the rise in the volume of money in circulation. Or, it could be a steady fall in supply. The possibilities are truly endless.
Could it be that even though the increase in silver price is predictable because of inflation, we only reach it once the new money enters circulation?
People are investing in precious metals because they expect the price to continue rising, probably as a result of the Federal Reserve’s actions. The actual changes in price, though, require an actual change in aggregate nominal demand, or an actual increase in the quantity of money being bid towards the specific good/service. This may be new money, or it may just be a larger percentage of the already existing quantity of money.
Regime uncertainty etc. But you can estimate regime uncertainty. Its hard but the market will reward actors who get their forecasts correct.
Even still, there’s no reason for entrepreneurs to always underestimate the factors increasing prices.
- “Regime uncertainty” is damaging because of how unpredictable it is.
- I’m not sure why you’re so hung up on this notion that entrepreneurs have been “underestimating” anything.
Prices are just an exchange rate agreed apon at the time of exchange. They can’t be wrong by definition as both parties agreed to the exchange.
The only time you could argue that prices are “wrong” is when it deterrs exchange from occuring(Priced too high). At which time there is already an inherent incentive for adjustment. The error argued is that a retail owner, for example, keeps a surplus of goods on his shelves because he refuses to lower prices. But even in those cases it’s not clear that the price is “wrong” as the retailer might be speculating that supply on the market will dwindled in the near future. At which point his higher prices made perfect sense.
[EDIT] So what can we pull from this.
Prices are not vectors.
They are historical static individual points of data, they do not move. Historical points of data can and will influence future points of data. But the error in thinking here is that prices are vectors, as opposed to individual points of data.
Right, Sieben is saying that the “wrong price” is any price that isn’t the equilibrium price. He seems to understand that market prices tend to equilibrium, assuming static causal factors, but doesn’t consider the fact that the theoretical equilibrium price (or market clearing price) is always changing.