John Maynard Keynes’ ghost has been haunting financial markets for more than a year. Both his ideas and his “barbarous relic”— gold — have staged a comeback. Does that mean the Gibson’s paradox he pointed to — that interest rates and gold prices are correlated — will also resurface?
The paradox was seen in a new light a decade or so ago: Long-term real interest rates and gold prices moved in opposite directions. Critics of easy money policy then claimed that Western central banks were selling gold to bring down gold prices — which would suggest an interest rate increase — and thus disguise their policies.
Now, when interest rates in the West are at rock bottom and affecting the dollar, central banks in emerging countries are actually buying gold.
This week, the Reserve Bank of India announced the purchase of 200 tonnes of gold. China and Russia have been shoring up their gold reserves for some time, presumably to diversify away from dollar holdings.
So, where will real long-term interest rates, whose depression many claim to be a cause of the crisis, go from here?