In last week’s technical report, we showed that in recent times the market had turned down. This brought the question from my colleague Charles Wyndham as to how this squares with our long term forecast that prices will rise.

Charles, who once used these pages to state that “it is always useful having a statistician as a colleague,” has at times been less than polite about our noble profession, so this week I am showing the figures in slightly more detail.

The graph below shows the path of our overall index, since we moved to daily publishing at the end of May last year, and the overall trend during that time, which indicates that prices have increased at an annualised rate of about 3%, a trend rate we are expecting to increase.

The graph below shows the difference between the two lines (i.e., the graph has been tilted slightly so that the trend line becomes the x-axis).

This graph shows four clear stages.

When we moved to daily publishing, the market was in a period that had begun in March, when polished prices were growing above trend. This stopped in mid-July.

From July through to November, prices were falling and the index dropped well below the trend line.

This again reversed in a period of above trend growth that lasted till February.

The purpose of last week’s article was to point out that we have currently moved into a period where the prices at which trades are actually being carried out, as opposed to the prices that are being asked, are falling. This does not mean, however, that the trend is downward.

The situation can be pictured as waves on a rising tide. There are times when the level of the sea falls although the trend is inexorably upward. In the ten months data that we have been looking at, the pattern of the residuals does at first glance seem to be reasonably regular, although it is too soon to be able to use this as a reliable tool for forecasting when the turning point will come. You may wonder, how it is possible to forecast the long term if we can’t forecast the short term, well, I don’t know if tomorrow will be warmer or colder than today, but I know it will be warmer in four months time.

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