Relative Value (economics) - Questionable Fluctuations

Questionable Fluctuations

The chart shows quite dramatically that establishing a current value or net worth based on the current price of items in a portfolio will give different results relative to the date at which these values are to be calculated. This is fairly obvious, because it is well known the prices rise and fall. The degree to which they rise and fall though is questionable, if any faith is to be placed in the ability of markets to link price with value. How can it be that oil is deemed to be two and a half times more valuable in 1980 than the baseline. History is showing the markets wild exaggeration of its relative value at that time. It was clearly overvalued, but not only in the sense of a speculative opportunity, more in the sense of that its price became wildly dislocated from what its price should have been compared to other items of value. The markets ability to link price with value perhaps only works in the short term. We know the relative value of the commodities in our shopping basket and are sensitive to relative differences that occur in recent memory. But cognisance of these relative differences suffers slippage over longer periods of time.