Why central banks do care about gold: the connection to interest rates

Section:

1:46a ET Monday, June 28, 2010

Dear Friend of GATA and Gold:

In his obscure academic paper published in the June 1988 issue of The Journal of Political Economy, then-Harvard Professor Lawrence H. Summers, eventually to become U.S. Treasury secretary and presidential economics adviser, explained the inverse relationship between gold and real interest rates and implied that government could control the latter if it could control the former:

http://www.gata.org/files/gibson.pdf

In recent and much shorter essays the financial writers Adrian Ash of Bullion Vault and Andrew Mickey of Q1 Publishing have elaborated a lot more understandably on the relationship between interest rates and gold.

Mickey's essay is headlined "Bernanke's Bind: One Chart Reveals Gold's Next Move" and you can find it at GoldSeek here:

http://news.goldseek.com/GoldSeek/1276495740.php

Ash's essay is headlined "What The Economist Doesn't Know About Gold" and you can find it at Bullion Vault here:

http://goldnews.bullionvault.com/gold_inflation_062320103

Both conclude that as long as the real rate of interest is being destroyed and government currency devalued, the direction of the gold price has to be up. GATA would put an asterisk on that conclusion, to the effect that gold's rise will be tempered by central bank gold dishoarding and backstopping of bullion bank gold paper sales; but the more that people buy and take delivery of real metal rather than bullion bank paper, the faster the gold price will rise.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.



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