If gold moves opposite to long term rates in a free market OR, relatively opposite, as in a gold standard, then what is operating is the anticipation of inflation, which is classical.
1. Int. Rates are raised to control the money supply. This tends to make money tight. The dollar strengthens. Gold should fall in this scenario as it should move opposite the dollar.
2. If interest rates are dropped, the money supply is increased. Prices are low at the time according to Gibson's pair of dox, but, are anticipated to rise, and therefore gold traditionally should go up. It rises more quickly than prices do, so it looks unrelated, or out of synchronization to inflation.
The Gibson paradox notes that goods' prices rise with interest rate increases. And gold's price, or its relative price (in a gold standard fixed-gold-price world), should fall.
Porkay this weird economic thingie? Why, when governments tighten belts do prices of goods peak and gold prices fall?
I think it has to do with delay. If we look at price peaks and valleys, then maybe they do co-incide with real interest rates peaks and valleys, but, while interest rates are pegged, prices, except during control periods, "float" in response. So prices delay their response to these rate changes. Raise an int. rate, and prices of goods will fall, but at some later time. Hopefully. Gold should fall in anticipation of these price reductions in goods, hence the inverse curve. Gold tends to buy a more or less constant level of goods.
I think this model is departed from during deflation-depression and gold will buy more money and therefore more goods than usual. During growth is seems to fluctuate inversely with the money supply if inflation is operative. During deflationary growth gold seems to rise and fall with the interest rate. This may be the seeming cause of the departure from Gibson's paradox in the last 6 years.
Was gold very important during the 20's, a period of deflationary growth? It appears not as its price did not change until the depression. It stayed at 20.67.
Lower the interest rate and prices of goods will rise, later, by an appropriate delay. Gold, a traded monetary commodity, will rise quickly in anticipation of these higher goods prices. Gold is basically saying, "I will buy more cheaper goods now, therefore my value is rising at his point in time." Gold's price rises to anticipate the higher value of goods in the future.
Interest rates are set in response to price levels. This would make high int. levels correspond to high prices and vice versa.
If Gold is looked at purely as inflexible money, a condition it approached from 1928 to 1934, then, when prices are low, gold's "price" is high relative to goods. When prices are high, its "price" is low relative to goods. The question is, when are prices high or low? This is not a stupid question. When income is low and inflation is low, are prices relatively low? No, not necessarily. But a complication is that gold is not purely money. So it is partly commoditized too.
If we look at income, wage and price controls, inflation, interest rates, money supply, market prices, costs and economics of producers, durability, substitution trials (paper indexes), and other factors concerning delayed reactions we can see that the relationship of gold's monetary price to the state of the economy may be a complex one. Various curves could be overlapping in different ways to affect the timing of moves in gold.
But one thing is certain, when curves are way out of sync for long periods, we can anticipate from Fourier theory, a rapid fluctuation at some future time. At some point the wave pile up has to hit the fan. If gold has been moving with interest rates instead of in opposition for 6 years then there is an out of sync variable and the curve has to play catchup. Gold's most sudden moves are always up, like most commodities. Sudden moves may be anticipated but without fine grained analysis of all the related curves we cannot foresee this exact inflexion.
We can roughly say that seven year cycles are long cycles and therefore there could be some inflexion at that point. The Kondratieff cycles of depression, inflationary growth stagflation, deflationary growth are perhaps behind us. We are evidently in a period of depression or just prior to it. The stock market has behaved with classical bust-rise-bust lockstep behaviour. 1929 and today is like the Evil Bobbsey Twins of depressions.
If it is indeed like 1929-1939 and it appears to be very similar, then we could be in for a slow price rise in gold for the next 5 years.
When is the word, not if.
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