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March 27, 2015

Why Price-Analysis Is Meaningless

By Sprott Money

This commentary will undoubtedly antagonize the entire mainstream media, many/most traders in the rigged casinos we call markets, and even many members of the Alternative Media. As the saying goes; “the truth hurts.”

The purpose of this analysis is not to accumulate (more) enemies, however. Rather, there is simply no way to properly explain why all of this pseudo-analysis is fatally flawed without explicitly making clear one, central point: all price-analysis is meaningless. Since “price analysis” accounts for roughly 95% of all the drivel which the mainstream media calls “analysis”; this one point alone invalidates virtually all of the Corporate media’s trash.

Why is all price-analysis meaningless? Understanding this requires understanding the economic definition of “price”: the intersection point between supply and demand. It is this intersection point (and only this intersection point) which bestows any “meaning” to price as an economic indicator, and thus analytical tool.

This intersection is the graphical representation of market equilibrium. It is only when a market is in equilibrium where price acquires any economic significance, to the point where it can then be used as a proxy for the actual fundamentals in whatever market/sector/economy is being analyzed. Price itself, is not, and cannot be a “fundamental” of any market.

What about a market not in equilibrium (i.e. where supply and demand do not intersect)? When supply is not in balance with demand; what is the significance of price as a proxy for fundamentals? None. Zero. It becomes totally meaningless as a proxy for fundamentals at that point. This means with any market not in equilibrium; price is (at best) of secondary significance to actual supply/demand fundamentals with respect to all analysis.

Of course, in the real world; markets are rarely in perfect balance, with supply absolutely mirroring demand. At any given second, or day, or even month; markets can and are out of balance – with supply exceeding demand, or vice versa. The key analytical point is that in legitimate markets; any time that supply and demand are skewed out of balance there is a natural mechanism which acts to pull that market back toward equilibrium.

What this means is that over the medium term (and in many markets, over the short term); all legitimate markets will correct toward equilibrium. Balance is restored for some short-term period, then supply and demand will again reach an imbalance, and then (again) the “corrective mechanism” will push that market back toward equilibrium. For practical purposes then; it is still crudely/approximately valid to engage in price analysis with any market which is roughly “in equilibrium”, meaning that deviations from that equilibrium are not exceptionally large, and corrections toward equilibrium are relatively strong/rapid.

What about markets which do not exhibit these characteristics? In markets where there are large/dramatic imbalances in supply and demand, or where imbalances are very slow to correct, the validity of “price” as a proxy for fundamentals (and thus a basis for analysis) steadily diminishes – and rapidly approaches zero. Then there are the even more extreme examples of market perversion: where supply never meets demand, and the “market” is permanently out-of-balance. Regular readers are intimately familiar with such markets; since we focus our own wealth-protection strategy on two of them: the silver “market” and the gold “market”. These two “markets” have both had significant annual supply-deficits for many years, and most likely several decades.

The insertion of quotation marks around the word “market” is for an important/obvious reason. In any legitimate market; it is impossible for supply and demand to remain out of balance over the long term. The gold and silver “markets” are permanently out of balance; ipso facto they are not markets.

Understanding the logic of that proposition requires understanding how markets correct, in order to restore balance between supply and demand. As previously noted; there is a “natural, corrective mechanism” to restore equilibrium to any market, and that mechanism is price, itself.

When supply exceeds demand; the price falls, to stimulate consumption (via the lower price) and discourage supply (also via the lower price). Similarly, when demand exceeds supply; price is supposed to rise – as far as is necessary to discourage demand and stimulate supply, until equilibrium is restored.

Through simply understanding this basic mechanism of supply, demand, and price, we can then understand and explain any market which does not exhibit this “natural” equilibrium for any extended period of time. Unequivocally, we can state that in any market which does not move toward equilibrium that the price has been perverted (i.e. manipulated).

To put this in even more blunt terms: for any market which exhibits long-term disequilibrium, this is absolute proof of the criminal manipulation of price. Price is always supposed to rise when demand exceeds supply, and price is always supposed to fall when supply exceeds demand. This is the natural manner in which all (legitimate) markets behave, without exception.

In the case of gold/silver “markets”, where supply never meets demand, and thus price never represents an “intersection point”; these (phony/manipulated/illegal) prices have no analytical significance or validity of any kind – except as evidence of the crime that is being committed in these markets. Thus using price as the primary data for “technical analysis” automatically invalidates such analysis.

However, this represents merely the beginning of our objections to most so-called “T/A”, which focuses primarily on price-analysis. All technical analysis of markets is based upon a long list of assumptions. At the top of this list are two, paramount assumptions:

a) “Free and open” markets

b) “Perfect information” for all buyers/sellers in those markets

If either of those assumptions is invalid (or any of the other assumptions on that long list); any technical analysis of that market loses all validity. Period. Garbage in; garbage out.

As already established; the permanent supply-deficit with respect to gold and silver is absolutely conclusive proof that we do not even have “markets” for these two commodities – let alone “free and open” ones. With respect to the second assumption; we have the exact opposite of perfect information: saturation propaganda.

What possible analytical value can be derived from “analyzing” the phony/fraudulent current price for silver of roughly $15/oz (USD) when any rational price for silver – expressed in our debauched fiat currencies – would start at $1,000/oz? Similarly, there obviously could be no possible value in “analyzing” the impact of a herd of 200-lb elephants on a particular ecosystem, when elephants weigh up to 15,000 lbs. Garbage in; garbage out.

However, the manipulation of markets does not start-and-end with gold and silver. Instead, as regular readers are well aware; all of our markets are manipulated. Indeed, the crime syndicate which is allowed to run this racket (the One Bank) can now manipulate all our markets via a single computerized trading algorithm. With all markets being manipulated; what is the value of price-analysis in any of these other markets? None. Zero.

From our starting point that all prices are manipulated; even when markets do manage to achieve supply/demand balance, this does not (somehow) “legitimize” the manipulated price. While price is the primary corrective mechanism for all markets; there are other, external mechanisms which can act to indirectly push a particular market back toward equilibrium.

In such a market, even though balance between supply and demand has been achieved, this does not represent a true equilibrium, because in the absence of that price-manipulation supply and demand would have equalized at some different level. Thus price-analysis remains invalid – because the true “fundamentals” (and thus true intersection point) for that market remain hidden.

With price as a tool for analysis not being merely worthless but extremely deceptive (in our ultra-manipulated markets); for the unscrupulous, price-analysis is the best way to lie about that market. This is why we get an army of talking-heads endlessly yammering on about gold and silver prices. If you want to lie about a perverted market, there is no better place to start than by “analyzing” its perverted price.

In such markets; all legitimate analysis starts and ends with supply and demand. The problem (as previously noted) is living in this Wonderland Matrix of endless, ludicrous propaganda, we now rarely have access to supply/demand data upon which we can reasonably rely. Garbage in; garbage out.

This does not mean, however, that this justifies us on falling back on price-analysis as some sort of lesser-of-evils. It is much better for any participant in any opaque, perverted, criminalized market to acknowledge they are standing in the dark than to pretend to be standing “in the Light”.

Courtesy Sprott Money News

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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