Financial Sense "Gold Wars: Gibson's Paradox & the Gold Standard" by Douglas Gnazzo 03/17/2006: "Lord Keynes, in one of his more lucid moments, coined the term “Gibson's Paradox”, in an attempt to explain the correlation between interest rates and the general price level observed during the years of the classical gold standard.
The reason it was a paradox is that Irving Fisher suggested that interest rates should move with the rate of change in prices, i.e., the inflation rate or expected inflation rate, rather than the price level itself.
Mr. Summer’s has the following to say on the matter:
“The price level under the gold standard behaved in a fashion very similar to the way the reciprocal of the relative price of gold evolves today. Data from recent years indicate that changes in long-term real interest rates are indeed associated with movements in the relative price of gold in the opposite direction and that this effect is a dominant feature of gold price fluctuations.” [3]
The above translates into English as meaning that gold prices move opposite (inverse) to real interest rates – in a free market that is. Although free markets are doubtful, the rest of the thesis remains plausible, at least for a while."
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