Gold and LT Bonds

[doodle]

I was thinking about the relationship between gold and LT bonds and the commonly held wisdom that there is a strong inverse correlation between real interest rates and the price of gold.

When general interest rates rise to positive real returns above inflation (and I realize that might be 10 years from now) is there any possibility that gold will stay strong?

In other words, is there really a possibility that LT treasuries price tanks at the same time as gold or is there only a tenuous relationship between the two?

[MediumTex]

If long term bonds were paying significantly higher rates than inflation, this would presumably be very bad for gold.

[Wonk]

Doodle--

What MT said.

Also, look at it this way: if real interest rates were positive for a sustained period of time, would there be much incentive to hold gold?  Probably not.  It's a pain to own and much more convenient to hold cash as long as your purchasing power stays strong.

[stone]

In 1981, interest rates were pushed up to higher than inflation levels and everything apart from cash crashed. I thought the reason why 25% of the PP is cash is for exactly that scenario.

[doodle]

So ultimately what do you think needs to happen to bring gold down? It seems that the price is really unrelated to inflation since we haven't had much of that.

[stone]

Doodle, my understanding was that In 1981 short term  interest rates were set high by Volcker at the Fed because he viewed that "gold is the enemy" and thought that continued success of the USD required the USD to be more rewarding for savers than holding gold. I guess if any large, trusted currency become clearly better than gold, then people will hold that rather than holding gold. If we have a massive stock crash now but earning prospects for companies are not impaired, then in the aftermath, I suppose people might sell gold to buy stocks?? Whilst all the major currencies are desperately trying to devalue so as to protect jobs in exporting industries and few profitable investment opertunities exist, gold will climb.  I guess people saving in gold is fairly harmless because gold is not needed for anything. When governments want to devalue, it is actually helpful to have people moving to gold because that devalues the currencies they are selling inorder to hold gold.  As and when governments change their minds, conceivably taxes/prohibitions may be used as an alternative way to thwart gold.