Gold - Why Its Price is Soaring

You may have noticed in the press or on TV that the price of gold has been rocketing up, and now stands at prices last seen 25 years ago. When the price of gold moves up sharply like this, it is an indication tht deep within the bowels of the capitalist economy something is stirring, and its usually not something good. The last time gold rocketed like this, for example, coincided with the high inflation of the 1970's, and the onset of the worst crisis since the end of the second world war, the slump of 1974-5. That slump and inflation continued until the beginning of the 1980's when the crisis of capitalism was resolved in the interest of capital and at the expense of labour by the class war politics of Thatcher and Reagan, which smashed labour organisation in order to drive down wages and conditions in order to push up profits. From 1982 until 2000 Stock Markets entered a long secular bull market on the back of that victory for Capital. At the same time Gold went into a steady decline, having reached a peak of over $800 an ounce it fell to a low point of $250 an ounce in 1999. From that point it has more than doubled, whilst Stock Markets have crashed and then stagnated. Gold's rise is most marked in terms of its dollar price, and as I will try to explain this is largely the explanation behind what is going on, but in the last year or so the price of gold has risen in sterling and euro terms too, by around 30%. What then is going on.

In order to explain it you need to understand something about the nature of what money is, and gold's specific role. I am giving a more detailed account of Marx's Theory of Money in a separate post below, but for now let me try to give the very short version.

Marx explains that the exchange value of commodities is determined by the amount of labour required on average for their production. On this basis you can work out that if a pair of shoes contains 10 hours of labour, whereeas a coat contains 20 hours of labour then 1 coat will exchange for 2 pairs of shoes. In a society where people barter this is fine. If you have a coat to exchange and want shoes you find someone who has shoes and wants a coat. But this is cumbersome. The more people trade the more a better solution is needed. Hence money. If you can find a commodity that everybody wants, which everyone will accept because they can use it to buy other things they want then you can price all commodities in this one commodity. For example, at one point when salt was very valuable salt acted as money. But most societies have used precious metals because, using Marx's method of determining value they tend to be very valuable because it takes a lot of labour to find them, establishing mines, get them out of the ground, smelt them etc. They are also durable, and capable of being divided up into various weights that can be used to denominate different amounts of value. Hence, gold, copper and silver have tended to be the most commonly used metals - copper for lower denominations, silver for more intermediate values, and gold for the most expensive purchases. Of these gold as the most valuable became predominant, and the values of silver and copper coins became functions of the value of gold.

For a long time actual coins made from these metals were used as money. This had many drawbacks. Gold smiths and usurers werre the most common possessors of gold hoards, and they would charge a premium over the value of their gold in order to release it to be minted into coins. Moreover, gold coins could be "clipped" in other words people would snip bits of the coin in order to accumulate gold whilst using the coin at its full value to buy things. Government's too in issuing coins could issue coins which had a face value equivalent say to a quarter of an ounce of gold (for a sovereign), but which actually contained less than that. In addition as trade increased rapidly during the 19th century using physical money was cumbersome. Capitalsist began to use instead Bills of exchange in their internal dealing with one another. For example if A sells £1,000 worth of cotton to B then rather than requiring B to give him £1,000 of gold currency straight away a Bill of exchange is raised. This is like an IOU which states that B owes A £1,000. A can use this Bill to purchase goods from C, by simply passing it to C so that B now owes the money to C not A. Quickly, Discount Houses arose that would accept these Bills and pay the owner of them money up front, in return for a discount. These became Merchant Banks. It is a small step from there to replace the actual mettalic currency in its higher denominations with the logical extensions of these Bills, paper money. All that this paper money does is to promise to pay the bearer a sum of gold. If this paper money is then issued by someone whose authority guarantees that this gold can be handed over - for example - the State - then this paper money becomes as good as gold.
However, between nations gold continued to reign supreme. There was little point in a French farmer being paid in English pound notes. So, if England bought £10 million pounds worth of goods from France, and rance bought £15 million of goods from England, then France owed England £5 million pounds, which would be settled by a transfer of gold from France to Engalnd.

But, then things moved on from there. Because, Britain became the biggest industrial country in the world during the 19th century, and its Empire stretched around the globe, many things that were bought and sold internationally were priced in pounds. Nations could and needed to accumulate pound notes in order to buy things. As long as the value of the pound remained fixed to the value of other currencies by them all being fixed to the price of gold then pound notes could act internationally as well as within Britain as money that was as good as gold. That was what happened, currencies were fixed to the value of gold according to the Gold Standard, and the pound became an international currency alongside gold - it became the so called reserve currency.

That continued until WWII. In the First World War Britain almost bankrupted itself by diverting a large proportion of its production into war production rather than wealth producing production. In order to pay for its production it suspended the gold standard and printed pound notes to cover its expenses. The pound notes continued to be accepted because of sterling's role as reserve currency, but the effect was to increase the number of these notes in circulation in relation to gold, and therefore to reduce the value of each note. At the same time the US was becoming the world's premier industrial power. The introduction of mass production techniques, combined with the introduction of electric power in place of steam led to huge increases in US production. Moreover, because the US stayed out of the war at the beginning it could use this production potential to meet the needs of European countriesw including Britain, whose production capacity was being wasted on military expenditure. As one of the jokes on Dad's Army went - the only thing Americans charged in the First World War was the interest on the money they lent to buy their goods.

Typical of the way capitalism operates in a contradictory manner, even the huge icnrease in US productive power at this time, which you would think should have provided increasing wealth led to disaster. The US began to export more and more goods abroad, compared to what it imported. In order to pay for these goods, therefore, other countries had to send gold to the US. Now the Gold Standard was supposed to provide a self-regulating mechanism to prevent these imbalances from getting seriously out of whack. Countries that sent gold out of the country had to increase their interest rates which cut their money supply reigned back consumption and activity, which reduced the amount they imported. Countries like the US which received gold did the opposite. But the US was already booming, and lower interest rates caused the boom to expand even more. BUt the more the expansion took place the fewer opportunities for profit there were. The rate of profit began to fall, so just as they had done during the 19th century capitalists began to look for places to invest their money where they could get higher returns - they began to speculate. On the back of that came the Stock Market boom of the 1920's. But, just as such speculation in the Railway Mania had resulted in catastrophe in the 19th century, so it did in 1929 with the Stock Market crash, and the massive poverty and unemployment, and waste of resources that followed with the Depression of the 1930's.
An almost identical thing happened with the crash of 2000. Massive increase in production brought about by new technology. Large increase in money supply, low iinterest rates brought in on aoccasion to offset potential panics - the Asian currency crisis, latin American currency crisis, Russian rouble crisis, Millennium Bug fears etc., and ridiculous speculation in Internet companies whose share pricres rocketed despite most of them never having a chance of making any money.

From the edn of WW2 the US occupied the role Britain had done. The dollar became the world reserve currency. In the 1970's France said it wanted to be paid in gold not dollar's because they resented the fact that the US could pay for its imports by simply prinitng dollars, which it did to pay for its expenses in the Vietnam war. Nixon abolished the dollar's link to gold, made it illegal for US citizens to hold gold, and thereby set the basis for the US to use its position to basically buy goods with increasingly devalued currency. The US since then has gone from being the world's largest creditor to the world's largest debtor. US citizens spend kmore than they save, the US government has a budghet deficit bigger than any the world has ever seen, and it pays for all this by pruinting more dollars. From what I have said before it can be seen that the only way for the dollar to go then is down. But in fact although the dollar has fallen against gold, and against sterling and the euro its value has not fallen that much. Why? Because of its continued role. To buy oil you must acquire dollars because oil is priced and sold in dollars, though Iraq changed that just before it was invaded and Iran is promising the same now. Moreovr, other countries such as China which sell a lot to the US buy US securities such as shares and Government bonds so that the US has money to buy Chinese goods and keep Chinese factories epanding.

In addition worried about potential recession and with their economies pretty stagnant already other countries like Britain, Europe and Japan have kept interest rates low and printed money in order to try to keep consumers spending and factories working (though increasingly that spending keeps Chinese factries rather than European factories working. So with the value of all currencies being devalued as governments print more of them, the only money that can go up in value is real money - gold. If the crisis gets worse, and more money is printed - gold will go much higher. To get to its previous high in real terms it will have to go to $3,000, and some gold investors think it could go as high as $5,000 or even $7,000 an ounce - the latter would match its perentage icnrease in the late 70's early 80's.

Globalisation provides tremendous opportunities for Capital. Bringin huge new areas of the world fully into the capitalist world economy, that is bringing them within the framework of a set of property rules which guarantee the ability for capital to operate and make profits, establishes vast new markets for the sale of commodities, and more importantly for Capital whole new workfoces that can be subjected to Capital and produce profit.

But at the same time it creates some significant problems. Despite the fact that it now operates on a global scale, and searches out the most profitable locations in which to establish production, Capital remains significantly tied to the nation state (though in Europe and to some extent in Asia this is becoming more tied to an economic bloc as for example the EU takes on more of the functions of a nation state). Partly this is because for very large companies a large part of their operations remains in their homeland, and the connections they have built up over generations to guarantee their ability to continue making profits are connections most closely held with their domestic state. This poses some problems.

Take a large British company like BP. Its operations are spread across the globe, but its ties are most closely with the British State. Indeed some would argue that largely behind the decision to invade Iraq was cocnern on the part of Britain to ensure the interests of companies like BP were protected - not just in Iraq but within the region. Anything that weakens the British State, let alone which might challenge the existence of that state, or might see a change of regime threatens BP. Capital as a whole has an interest in preventing instability in the main economic centres, Capital most closely associeated with those centres has an even greater interest.

But the emergence of new dynamic centres of production in Asia, and Eastern Europe has the potential for creating such instability. Capital is forced by its very nature to seek out these more profitable locations, but in doing so it de-industrialises its own heartlands. The argument has always been that this would not be a problem because as more mature products became products made in developing countries, so labour and capital would move into new higher value production at home. But, countries like China and India with huge highly educated workforces are able not to just to become the centres for production of mature products, but are increasingly the centres for high value added production too.

The effect is most pronounced in the US, but Britain has similar characteristics. Increasingly, the US has moved out of factory production. It continues to be a major source of food because of its huge, fertile areas, and large capital intensive farms. It is probably the world's premier producer of high value products, through companies such as Microsoft, Intel etc. But the employment opportunities in these industries are very limited, partly because they are high value added industries that rely on a relatively small number of very highly trained and specialised people. The rest of its production it has in great swathes moved to low wage countries, or worse still for the US has been foced out of by new companies based in these countries that have simply undercut it and driven it out of business.

Yet unemployment is relatively low in the US - this has to be considered carefully, however, besides the fact that US unemployment statistics hide a large amount of unemployment because huge numbers of workers that no longer receive benefit, and have given up the hope of a job no longer register, the way the US collates the data is fraudulent. It assumes that large numbers of people are self employed, and it is not infrequent that this figure has to be periodically adjusted by around half-million or so people. One of the reasons that unemployment is low is that large numbers of people have been employed in both retailing, and in service industries.
But this is not self sustaining. In order to pay for the goods you import you have to export other goods. Some "goods" produced in service industries can be exported and be very profitable such as those related to the Financial Services industry. But many of the people employed in service industries are not of this type, they are people employed at McDonalds, or hotels, etc. These are things which are very difficult to export or to earn foreign currency income from. The biggest retailer in the US is Wal-Mart, and it demonstrates the problem America has. 70% of everything sold in Wal-Mart comes from China.

So a large number of US workers are employed selling things to other US workers, but the things they sell are made outside the US. The US does not produce the goods to sell as exports to pay for these goods so it has to borrow the money, or print the money. As I said above it does both. The US has effectively been robbing the world blind for more than 30 years by using the role of the dollar as reserve world currency. It buys things, and prints more dollars to pay for them. The effect is that countries selling to he US get paid back in money that is continually being depreciated as more of it is printed.

The Chinese were wise to this, and prevented it by pegging the renminbi to the dollar. So as more dollars are printed and the dollar falls so the RMB falls too. This has caused great consternation in the US. The US has the gall to accuse the Chinese of currency manipulation because they refuse to accept devalued US currency in exchange for their goods. This has caused a problem for the US because its largest trade deficit is with China. So the US has to borrow money. The Chinese are happy to oblige because China is icnreasingly buying up the US by the backdoor, and at the same time by lending to the US the US keeps buying Chinese goods, keeping Chinese workers employed, and making profits for Chinese companies.

But those workers still employed in manufacturing in the US have been finding over the last 20 years that their wages have been falling in real terms. Their companies cannot compete with companies based in China paying workers a 30th of what US workers receive, and are forced to cut or hold down prices, and wages, and increasingly to lay workers off, cut health insurance, pension contributions etc. GM which until recently was the world's biggest car marker is in this position as I have detailed in previous posts. It looks almost certain to go bust. Ford is slashing jobs and will probably follow suit.

But US workers have made up for stagnant and falling wages by other means, which have in turn been caused by the vast sums of money printed by the government. After the Stock Market crash of 2000, the money sloshing around in the economy had to go somewhere. Much as in Britain it found its way into property. House prices began to rise sharply. Seeing their house increase in price US workers thought they had become better off, and were like their UK counterparts encouraged to borrow against their house to finance their consumption. They have done so with vigour, running up huge debts which have enabled them to keep consuming even while their wages were falling - hence as I said above they now spend more than they earn.

The US government rather like the British government and European governments have every reason to encourage such behaviour. The last thing they want is for the whole thing to come tumbling down even as it did in 1974, let alone as it did in the 1930's. In fact given the larger scale of production, and the enlarged sphere of activity for Capital worldwide a major crisis now, would probably be worse than the 1930's. That would cause huge problems for Capital. It relies on the ideological superstructure in which continually rising living standards are a central plank. Large scale mass unemployment lasting for a prolonged period would undermine the ideology of consumer driven capitalism, leading inevitably to large scale civil unrest.

In Europe things are slightly different because governments have maintained higher levels of social welfare than in Britain or the US, and so higher levels of unemployment for example in France and Germany have not caused unrest - though the riots last year in France show how easily that could change if economic crisis erupted.

For some time now financial markets have been worried that at some point the Chinese, Japanese, the OPEC states etc. that finance US consumption will decide enough is enough, will fear a sharp drop in the dollar which would seriously devalue the worth of their US assets, and that they will begin at least to slow down their lending to the US, or worse might begin to withdraw some of it - which they have so far avoided because to do so would cause the very collapse they fear. But a number of these countries as well as Russia which is piling up large foreign earnings with the rise in oil prices, have announced they will begin to diversify their reserves, buying amongst other things gold. Iran is creating an oil market based in Tehran which will price oil in Euros, and will challenge the New York Mercantile Exchange (NYMEX) as a centre for the trading of oil. China is buying gold and euros, and is using some of its dollar reserves to buy commodities such as coffee, copper, zinc, iron, etc. on the commodities exchanges as well as doing deals with countries in Latin America and Asia for long term contracts for these goods.

None of this is good for the US in particular, but on a lesser scale nor is it good for Britain or Europe. If the US and Britain (which also has a huge Trade Deficit, and massive private indebtedness) find that people no longer wish to lend them money then either they will be forced to print large amounts of paper curency which will trash the value of their currency and lead to massive inflation, or they will be forced to send their economies into a large retrenchment, with skyrocketing interest rates to deter spending and increase saving, in the hope that they can export the surplus production to pay off their debts. Europe in general which runs a trade surplus is in a less serious position, but if the US let alone the US and Britain, went down the latter course Europe would find not only that its exports fell catastrophically, but that it was competing with a flood of British and US exports too. In short either scenario leads to a huge world crisis. Within that context and the risk of each country trying to rescue itself by printing more and more money (the new US Fed Chief, Ben Bernanke, famously said that in order to stave off depression and deflation in the US they could crank up the printing presses and throw dollar bills out of helicopters) the risk would be not just of the kind of 20% plus inflation of the 1970's, but of the kind of hyperinflation of Germany in the 1920's.

Under those circumstances, the value of real money - gold - shoots to astronomic levels. Savvy investors such as Warren Buffet and George Soros are already banking on the dollar falling severely. Just over a year ago some of the so called Gold Bugs - the super rich who made billions in the late 70's when Gold went up from $30 to $800 dollars an ounce decided that they saw all the same circumstances now as then, and began to buy gold in large quantities.

In the 1920's the Roaring 20's seemed to convey the message that everyone could be rich. Capitalism seemed to be producing never ending wealth. Overnight it turned into the opposite. Capitalism is cock a hoop at the moment after he fall of Stalinism, but a look beneath the surface shows that all of the contradictions that Marx analysed 150 years ago continue to mount and become heightened. The capitalists might not share that analysis, but significant sections of their more far sighted members iknow that all is not well. That is why gold is going up, and is likely to continue to go up, and up, and up.....