"The key is that gold is tied to real interest rates. Where I differ from them is that I use real short-term interest rates whereas they focused on long-term rates.
Hereâ??s how it works. Iâ??ve done some back-testing and found that the magic number is 2% (Iâ??m dumbing this down for ease of explanation). Whenever the dollarâ??s real short-term interest rate is below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. Itâ??s my contention that this was what the Gibson Paradox was all about since the price of gold was tied to the general price level.
Now hereâ??s the kicker: thereâ??s a lot of volatility in this relationship. According to my backtest, for every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (thatâ??s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.