Tuesday, November 24, 2009

CNBC exposes gold suppression by the Fed

I almost choked on my juice this morning when I saw this segment on CNBC, when Rick Santelli blurts out that Lawrence Summers, former Treasury Secretary and current National Economic Policy director, published a paper on the suppression of gold prices by central banks. Watch the whole 10 minute segment:


In fact, Summers' white paper was coined (pun intended) "Gibson's Paradox and the Gold Standard", and is available here:


The willingness to hold the stock of gold depends on the rate of return available on alternative assets. We assume that the alternative assets are physical capital and bonds, both earning a real rate of return r.

The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold , reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level.

Santelli basically validates to mainstream financial TV audiences what gold bug conspiracy theorists have been clamoring about for at least a decade--that it's in the central banks' best interests to keep a lid on the price of gold, in order to keep interest rates low. Low interest rates allow central banks to fund deficits at a lower cost.

The guest speakers in the segment speculate that gold, once unshackled by central bank suppression schemes, will eventually be re-priced to its natural price, somewhere north of $11,000, based on supply and demand fundamentals.

Now THAT sounds crazy, but given the USDollar's demise, it is no longer unthinkable.

No comments:

Post a Comment