I have talked about the open selling of gold by Central Banks. And whatever their motives might have been, they made no secret about what they were doing. They certainly had as much right as anyone to sell their gold.

But suspicions began to arise that something other than the open selling by Central Banks was suppressing the gold price. The intellectual heavy lifting was done by two very bright men named Reg Howe and Bob Landis. (There is a link on this blog to their website, goldensenxtant.com, that tells the story that I am about to tell, but in far greater and more sophisticated detail). Starting around 2001, something strange seemed to be happening because of the gold market’s non-response to an economic phenomenon known as “Gibson’s Paradox.”

I am not sure why it is considered a paradox, but this economic rule of thumb pertains to the relationship between the price of gold and our old friends real interest rates. Real interest rates, you may recall, are nominal interest rates (e.g. the rate on your bank CD) minus the rate of inflation (as best you can calculate in light of the government’s ongoing statistical lies).

Here’s an example of how you would figure a real interest rate: Suppose the nominal interest rate on your Bank CD is six percent. So far so good, but if you also have an inflation rate of six percent you are effectively earning zip-a-dee-doo-dah on your money.

Historically, there appears to be a rough inverse correlation between real interest rates and the gold price. In other words, the price of gold will tend to go up when real interest rates go down, and vice versa. That is Gibson’s Paradox.

This seems pretty easy to explain. When real interest rates are high you can actually earn money on your money. This tends to make people want to save rather than spend and that, in turn, will mean less spending and therefore less inflation. Less inflation usually means less desire to own gold. Conversely, when real interest rates are low, and the best use for money is spending it rather than saving it, then gold looks more attractive as protection against the resultant inflation.

Now for a side note. Like all economic principles, Gibson’s Paradox isn’t a scientific law like the law of gravity. In fact, anything you call a “law” that has its roots in human behavior is suspect. Thus, much of what is called social “science” is garbage.

A further problem stems from there being recurrences that resemble “laws,” but turn out to be sheer coincidences. An example: for a number of years the Superbowl was considered predictive of the following year’s stock market. If an NFC team (or a non-original AFC team, i.e., the Steelers) won, then the market would go up. Otherwise it would go down. That “Superbowl Predictor” worked year after year. That is, until the New England Patriots (an original AFC team) started winning Superbowls. The Superbowl Predictor turned out to be just a coincidence.

So, with that caveat, I return to Gibson’s Paradox. Starting in the 1990’s Gibson’s Paradox seemed to no longer “work” in the gold market. Real interest rates went down, which historically implied that the price of gold would go up, but it didn’t.

Messrs. Howe and Landis smelled a rat and I will next identify the rat and dissect it.

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