Gold Wars: Gibson's Paradox & the Gold Standard

By: Douglas V. Gnazzo | Sun, Mar 19, 2006
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"The First Casualty of War is Truth" [1]


President Roosevelt confiscated all of the people's gold under the Trading With The Enemy Act, which comes from The War Powers Resolution. At the time, the United States was not at war with any foreign countries, which by process of elimination leaves only one other party mentioned in the act: We The People. See Presidential Executive Order 6102.

Subsequent legislation: Emergency Banking Relief Act of 1933 US Statutes at Large also made it illegal for private citizens of the United States to own gold.

The so-called dollar price of one ounce of gold increased from $20.67 to $35 dollars per ounce.This is a 69% devaluation of the dollar in one swell swoop. See Presidential Proclamation (no. 2072) of Franklin D ...The Gold Reserve Act.

The above referenced Emergency Acts and the other various proclamations regarding banking and gold, along with The Federal Gold Reserve Act of 1934, are all arguably unconstitutional according to the fifth amendment of the Constitution.

The Bill of Rights speaks to the issue of private property within the fifth amendment, which in part says, "nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation". See: Amendment V: Individual debt and double jeopardy.


On December 31, 1974, the restoration to legal ownership of private gold holdings became the law of the land once again. It is true that private citizens may now own gold. However, are there extenuating circumstances that remain hidden in the shadows?

Why does a one ounce gold eagle coin have stamped on it $50 dollars, yet in the market place it sells for $550 dollars? Why is the gold on the government's books registered at just over $42 per ounce?

Why all the discrepancies - could it be that there is a silent war against gold being raged? Is there a covert operation in full swing behind the scenes, a futile attempt to reign in the sovereigns of sovereigns? If so, who is it that perceives gold to be the enemy?

"All of the government's monetary, economic and political power, as well as its extensive propaganda machinery, will be enlisted in a constant battle to drive down the price of gold - but in the absence of any fundamental change in the nation's monetary, fiscal, and economic direction, simply regard any major retreat in the price of gold as an unexpected buying opportunity." [2]

Gibson's Paradox

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.

The Theory of Linkage

Others have done similar work. Professor Fekete has written rather extensively on the theory of linkage between the price level and the interest rate level. Fekete references the 1947 work of Gilbert E. Jackson regarding such linkage as follows:

"In 1947 the British-born Canadian economist Gilbert E. Jackson studied the behavior of just two economic indicators, that of the price level and the rate of interest. He found that the two are linked. Sometimes the price level leads and the rate of interest lags; at other times, the other way around." [4]


The Gold Anti-Trust Action Committee: led by Bill Murphy, has done enormous amounts of work on the Gold War, and the price manipulation scheme orchestrated by the powers that be.

With an army of dedicated freedom fighters behind him that include Reggie Howe, Frank Veneroso, and Chris Powell, GATA has turned the tide. The unparalleled interventional analysis of Michael Bolser has the Fed studying their next move in a real live game of chess.

In one of my earlier papers: Silver IS Money, Behold A Pale Horse - Part IV I showed the following chart:

Gibson's Paradox

Chart Courtesy of GoldenSextant &

Gibson Revisited

On the chart, the 30-year U.S. Treasury bond yield minus the annualized increase in the Consumer Price Index (calculated as the sum of the monthly CPI increases for the preceding twelve months) defines real long-term interest rates.

The chart clearly shows that the inverse relationship between long term interest rates and the price of gold remained fairly intact until something funny happened around 1995, as the relationship suddenly diverged in the opposite direction of what it had been.

Interest rates and the price of gold are no longer running inverse to one another, but in the same direction - and the direction is down.

As real rates declined from 4% to 2% the price of gold droppedfrom $400 an ounce to around $270 an ounce. According to Summers and Gibson's Paradox, the price of gold should have moved in the inverse direction - or up in price. So what happened?

The Fix

From the transcript of the minutes of the Federal Open Market Committee on March 26, 1991, the following exchange took place between Fed Governor Wayne Angell and Federal Reserve Chairman Alan Greenspan.

"Chairman Greenspan: "Is there not any mechanism by which we can create swaps or RPs or something of that nature in which essentially we have fixed the exchange rate of our holdings?"

Fed Governor Wayne Angell: "You could have an exchange of puts. In effect, you could swap puts and thereby assume that somebody would ultimately want to exercise that added advantage."

Mr. Greenspan: "Well, the point at issue is that it's a [forward] exchange transaction that has a date on it. ... And effectively that gets factored into the market and neutralizes your position. What I'm thinking of -- and I just thought of it at this moment, so there might be plenty of reasons why not -- is an open-ended fixed-price mutual put, to put it in the terms that Governor Angell stipulated, so that we can eliminate part of the problem that is on the negative side of the current".

Mr. Angell: just prior to the end of the meeting said: "There's one slight addendum to this discussion: We have a reserve holding that costs us more money than what is reasonably in prospect to happen on foreign exchange rates and that is that we really are not a small reserve holding currency country.

I think we actually have official reserves of $85 billion, Sam, compared to Taiwan's $75 billion. And if you mark our gold to the $358 price, we end up with something like $170 billion. There are opportunity costs because we don't get interest on that gold as we do on our foreign exchange holdings.

That cost is out there also. I would hesitate for us to have foreign currency holdings that have swap puts that just sit there, which is now becoming the case for our gold." [5]

Did You Catch That?

He said, "swap puts that just sit there" on the U.S. gold reserves. Couple the above with the Fed's general counsel, J. Virgil Mattingly's 1995 statement to the FOMC:

"It's pretty clear that these ESF (exchange stabilizing fund) operations are authorized. I don't think there is a legal problem in terms of the authority. The statute [31 U.S.C. s. 5302] is very broadly worded in terms of words like 'credit' -- it has covered things like the gold swaps -- and it confers broad authority." [6]

Gibson's Paradox and The Gold Standard

III. Real Interest Rates and the Relative Price of Gold, 1973-84

"Figure 4 displays the inverse real gold price and our estimate of the expected pretax real interest rate. The strong co-movement over the longer cycles is reminiscent of Gibson's paradox. Variation in the real interest rate appears to be responsible for much of the year-to year movement in the relative price of gold."

After 1980, inflation exhibits increased volatility, and the ARIMA forecast is less satisfactory...Yet, the impression that real rates were high after 1981 and that these high rates were associated with a low Relative price of gold vis-à-vis the 1980 level is unmistakable." [7]

V. Summary and Conclusion

"The Gibson paradox has proven to be an especially stubborn puzzle in monetary economics. We believe that taking account of the role of gold as an asset contributes significantly to our understanding of the anomaly.

Our model accounts for the historical coincidence of the Gibson's paradox and the gold standard, an observation made by Friedman and Schwartz (1982) but not incorporated in previous attempts to rationalize the Gibson phenomenon." [8]

I Believe

Obviously, these guys believe that there is a direct association between changes in interest rates and movements in the price of gold - in the opposite direction, nonetheless.

However, our chart does not show that. It shows that such was the case up until about 1995, and then suddenly the relationship reversed.

Interest rates started coming down AND the price of gold came down as well.

Presently interest rates have been going up along with the price of gold. What gives?

What gives is there is no such thing as a free market - if there ever was. In today's paper fiat land of make-believe, the wizards of finance hide behind the curtain, controlling the appearance of the Land of Oz. Moreover, things are not as they so appear to be.

So what's the big deal - gold's going up in price, the stock market is going up or holding up, the dollar stopped falling out of bed for awhile, and bonds are doing O.K.

Did you catch that - Bonds are doing O.K.

Interest Rates

Bonds can only be doing O.K. if interest rates are not rising too fast on the long end of the curve. The short end of the curve the Fed is not worried about. In fact, the Fed wants the short end to invert above the long end.

Why? Because they want to give the appearance, the illusion that everything is O.K. They want it to seem as if they are at their watch, protecting the economy by raising interest rates, ever so methodically, to ease the patient down off its high.

The Fed is trying to raise the short end of the curve above the long end. If they raise long-term rates, the long bond is in trouble. If the long bond is in trouble, then the real estate market is in trouble.

The real estate markets, and its new age debt instruments of mass destruction, have been the glue holding together the paper house of cards we call our financial system. If real estate goes the game is over. The emperor will be naked - exposed in the true perversion of his ways.

The largest market is the debt or bond market, especially if one considers the derivative debt market. This is what scares the Fed, and that gold is the ever vigilante sentinel that loudly speaks when anything is amiss with the monetary system of a country.

Derivatives: Potential Benefits and Risk-Management Challenges

"Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth. As a consequence of the increasing demand for these products, the size of the global OTC derivatives markets, according to the Bank for International Settlements (BIS), reached a notional principal value of $220 trillion in June 2004." [9]

Concentration in Derivatives Markets: The Case of U.S. Dollar Interest Rate Options

"Financial consolidation has reduced the number of firms that, by acting as dealers, provide liquidity to the OTC derivatives markets. Two years ago, I expressed particular concern about the implications of dealer concentration for risks in derivatives markets. Among the markets identified as appearing to be especially concentrated were the markets for U.S. dollar interest rate options. Those markets have become increasingly large and important as the U.S. markets for fixed-rate mortgage-backed securities (MBS) have grown and as an increasing share of those securities have come to be held by investors that manage the prepayment risks associated with those instruments.

Concentration in the OTC options markets raises at least three specific concerns. First, market illiquidity may result from a leading dealer's exit and that illiquidity has the potential to adversely affect Fannie and Freddie and other hedgers of mortgages and MBS. Second, meeting the demands for options by mortgage hedgers involves market risk to dealers; a concern that has been heightened by the fact that the notional value of options sold by dealers significantly exceeds the notional value purchased. Third, the failure of a leading dealer could result in counterparty credit losses for market participants.

However, only about five or six of them have direct access to the supply of options from debt issuers; the others must depend on the inter-dealer market for a substantial portion of their supply. The exit of one of these five or six may or may not adversely affect market liquidity, depending on the reason for the exit and on the way in which other dealers react.

If a dealer is forced to exit because of a credit problem unrelated to its options dealing, other dealers are likely to take its place quickly. If the exit is the result of losses from options dealing, possibly in difficult market conditions, other dealers with similar positions are likely to be pulling back as well, which could leave the options markets quite illiquid. [10]


The boys seem to be getting a wee bit nervous over interest rate derivatives and other instruments of structured finance - as they might not be quite as structured as they originally thought. Paper derivatives may very well carry the seed of their own self-destruction within. Warren Buffet seems to think so.

The Governor of the Bank of England was so frightened at one time that he stated:

"We looked into the abyss if the gold price rose further.

A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake."

"Therefore , at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded." [11]

In other words, the Fed is most concerned with the ten-year and thirty-year bond yields. This is their line in the sand. They do not want the long end of the yield curve to rise.

Towards the ultimate goal of protecting the debt market the Fed and Treasury want to keep gold under wraps, and if they can - down and out for the count. They have many weapons at their disposal. Do not underestimate your opponent.

We think we here the sounds of a rider in the distance - the one raging war against gold. Heed the sounds. A battle may be on the horizon of the gold market. It is often times good to retreat and lose the battle, to live to fight another day - to win the war.

The opponent is most dangerous when he appears the weakest and weakest when he appears the strongest. Let him make the first move that starts his downfall.

"Behold, a pale horse, and its rider's
Name was Death, and Hell followed him." [12]

Come Visit Us At Our New Website and Read The Honest Money Gold & Silver Report Open Letter to Congress.

[1] Aeschylus.
[2] Irwin A. Schiff
[3] Summers & Barsky - Gibson's Paradox and the Gold Standard
[4] Fekete - Causes and Consequences of Kondratiev's Long-Wave Cycle.
[5] FOMC Meeting March 26, 1991 ( 2.8 MB PDF )
[6] J. Virgil Mattingly's 1995 statement to the FOMC
[7] See 5
[8] See 5
[9] FRB: Speech, Greenspan-- Risk Transfer and Financial Stability--May 5 ... 2005
[10] See 9
[11] Edward A. J. George, Governor of the Bank of England and a director of the BIS
[12] Revelations of the Bible



Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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