Robert Murphy has written an article related to the efficient-markets hypothesis or EMH. It is certainly worth a read, as most of Murphy's work is interesting and accurate.
EMH is an interesting, yet wrong, hypothesis. It is true that markets adjust according to what is known. Prices also adjust in the present based on what is probably going to happen in the future. If Apple announces that it has the latest and greatest gadget that will exceed all expectations, then there is a good chance the stock price will go up. Apple does not have to have any sales of the new product and you may not even know specifically what it is, but just the expectation of future sales, and hence profit, will drive up the price of the stock.
At the same time, this doesn't mean that everything is known equally. It doesn't mean the price is rational, other than the fact that the price is what it is. The market has set the price, so who am I to argue on what is rational or irrational? As I often mention in this blog, it doesn't matter what the fundamentals are or what you think the price of something should be. It matters what the billions of people in the world think.
EMH reminds me of a joke (I wish I could give credit where credit is due). There are two guys walking down the street and one of them is an economist. The other guy says to the economist, "hey, look, there's a twenty dollar bill on the street." The economist doesn't even look down and keeps walking. He says, "That's impossible. If there were a twenty dollar bill on the street, somebody would have already picked it up."
Austrian economics does not allow us to predict the future with certainty or accuracy. Again, you can't predict anything with certainty that involves the thinking of millions or billions of people. But we can make some good assessments using Austrian free market economics and see where the market does not seem to correlate with the fundamentals.
The housing market is a good example of all of this. It seems obvious now that there was a housing bubble, but it was not obvious at the time. But it is certainly conceivable that if someone gave some serious thought to the whole thing, they could have seen that the exuberance in the market would wear off when more people started struggling to make their payments. There were some Austrian economists that did predict a crash in the housing market. They were aware of the boom-bust cycle. They realized that housing prices were going up much faster than other prices. They could have been wrong, but it was a reasonable prediction to make.
Let's look at gold now. Some say it may be in a bubble of its own. We may very well see a sell-off in the near future on profit taking. But we can also look at the fundamentals and see that the Fed has created massive amounts of new money and says that it will continue to do so. If this new money gets out of the banks and into the economy, prices will rise drastically. Commodities will most likely explode. Gold has the potential to double or triple in price in a short time frame. Again, this is not to say that this will happen, but only that it is a good possibility based on what we know.
There are many people that don't analyze this. There are many people that don't understand this. They are missing opportunities. Perhaps the people that know little believe in the EMH because they really do have no chance of beating the market. These people don't understand monetary policy and inflation and do not understand that gold might rise significantly due to the policies of the Fed. There is a twenty dollar bill on the street. Will you look down to pick it up?