commentary31: "Gibson's Paradox is a phenomenon first observed under the classical gold standard, when long-term interest rates moved in tandem with the general price level. It was a paradox precisely because rates moved with actual prices rather than inflationary expectations. In a similar vein, recent research makes the case that actual gold prices are a far better predictor of interest rates and inflation than other more frequently used measures. D. Ranson, Why gold, not oil is the superior predictor of inflation, (H.C. Wainwright & Co. Economics study, published by World Gold Council, November 2005).
Precisely because it anticipates inflation so well, gold is also a powerful predictor of nominal interest interest rates, both long and short. This, in fact, is a more rigorous test of the relative powers of gold and oil, because bond market performance is an objective indicator, and is free from many of the errors of measurement that bedevil the official indices of inflation. In similar research on short-term interest rates we have obtained very similar results.
Our calculations show that the time frame that yields the optimum correlation (0.73) between changes in the price of gold and changes in the 10-year T-bond rate is about twelve months. ... These results reveal two respects in which the information in the gold price is superior [to oil prices]: gold provides a much earlier warning, and the correlation with interest rates is significantly tighter regardless of the time frame.
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The investment applications of gold are numerous, but not widely recognized. Analysts often try to anticipate where the price of gold is heading; however, knowing where it has already been is far more fruitful. Despite growing recognition of gold's forecasting power, investors schooled to believe that gold is a 'barbarous relic'"
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