Gold Price Crash Confirms Conjuncture

Today, the price of gold has fallen 6%. In the last two days it has fallen by around 12%. Since its peak of $1943 an ounce in September 2011, it has fallen by around $550 an ounce or about 30%. That confirms the predictions I have been making recently that Gold had peaked, and would be unlikely to see any large rise again unless we were to see a massive rise in inflation, or a potential collapse in the global money system, similar to that which looked possible in the 1970's. It confirms the view I expressed recently that The Long Wave Summer Has Begun.

In Volume II of Capital, in his analysis of fixed and circulating capital, Marx sets out some preliminary analysis of the way in which fixed capital that has varying durations, and turnover periods, has an effect on the economic cycle. His analysis is necessarily only tentative at that stage, but he makes further comments in correspondence with Engels that he was aware, as were other economists of the time, that much longer economic cycles existed than just those of the normal business cycle. The first real systematic work on analysing these Long Wave cycles was done by the Russian economist and statistician Nikolai Kondratiev. He set this out in a number of works during the 1920's.

In his 1926 work, he also sets out the long wave periods and describes the technological and other objective factors, which play a part in them.

Dating Of Long Waves
Author	First Upswing	First Downswing	Second Upswing	Second Downswing	Third Upswing	Third Downswing
Engels		1825-42	1842-68	1868...
Tonelli			1852-73	1873-97	1897 - 1913
Bresciani-Turroni			1852-73	1873-97	1897 - 1913
Van Gelderen			1850-70	1870-95	1895...
De Wolff		1825-49	1850-73	1873-95	1895...
Trotsky	-1781	1851	1851-73	1873-94	1894-1913	1913...
Kondratiev	1780/90 – 1810/17	1810/17 – 1844/5	1844/5 – 1870/5	1870/5 – 1891/6	1891/6 – 1914/20	1920..

Source:Louca

As I've set out elsewhere - Konratiev's Long Waves - Kondratiev and others like Schumpeter have described the role of the Innovation Cycle, and the introduction of new base technologies within the Long Wave Cycle, but the Innovation Cycle itself is not an independent variable. The drive for new base technologies is driven by a number of objective factors within Capitalism itself, for example, the fact that existing techniques, and technologies eventually become exhausted, both in terms of raising productivity, and in terms of the commodities produced using them, become mature, and then suffer from a falling rate of profit. Additionally, the Long Wave operates via a feedback loop on to the demand for primary materials, the development of which require very long lead in times. For example, from when a new boom creates sufficient demand to create high enough copper prices, to encourage new supply, it takes around 12-13 years to look for appropriate sites, to begin development of the mine, and for it to reach optimum production.

Extending Kondratiev's schema, we have the Third Down swing running from 1920 to 1945. Its generally thought, however, that the new boom can be more properly dated from around 1949, as the effects of WWII, delayed its onset. That Long Wave Upswing runs from 1945/9 – to 1974. It began to run out of steam in the late 1960's, and the conjunctural shift to the Long Wave Autumn was marked by the onset of the “Second Slump” in 1974. The ensuing Long Wave Autumn that runs from 1974-1987, is marked by the typical shift into more deep seated class struggles, as the previous accommodations can no longer be achieved. Its culmination, in Britain is the defeat of the Miners.

The Long Wave Winter that ensues sees the development of new base technologies, and a rising rate of profit, through the late eighties and 90's. The Downswing lasts in total from 1974-99. After 1999, the new base technologies that have found their way into new productive techniques, and new commodities, in the form of computerised machines (CAD/CAM, the revolution in banking, and other services i.e. the basis of Neo-Fordism etc) and a wide range of microchip and mobile technology products (PC's, software, computer games consoles, mobile phones, flat screen TV's, computerisation of vehicle engine technology, the Internet, and so on ad infinitum).

The Long Wave upswing begins in 1999, and should run to 2025-30. Its Spring Phase has already seen a massive increase in global growth based on these new commodities and productive techniques, as well as in fixed capital formation, both of which doubled during the first decade of the new century. During that ten years, more patents were applied for than in all previous history, and the production of goods and services during that period was equal to 25% of the total goods and services produced in the whole of human history!

The Spring Phase ran from 1999 to 2012/13. As with all previous such phases, this massive growth phase brought forth a sharp rise in primary product prices, which led to furious growth of supply of these products, along with the introduction of a range of new technologies to both produce and use them more efficiently. Against all the prognostications of the catastrophists and Malthusians, not only did the global economy grow dynamically, but neither the oil nor the gas, nor any other such products ran out.

In fact, quite the opposite, new materials such as graphene have been developed, which offer a range of uses that will save on both energy and material usage.

New technologies like “fracking” now mean that the US is likely to once again overtake Saudi Arabia as the world's largest oil producer. It has already cut US gas prices by around 80!!!

The Long Wave Boom has brought development to the last continent on the planet – Africa. Growth in several African economies has continued at a strong pace even during the North Atlantic debt crisis. Several economies in Africa have been able to move towards large scale industrial farming to take advantage of high world food prices, thereby providing a ration and progressive alternative to the misery of the subsistence farming that has caused millions of people in Africa to live on the edge of starvation in the past.

Some of those economies will now suffer as primary product prices fall as the global economy moves into the Long Wave Summer, but a number have already learned the lessons of the past, and have used their new wealth to provide education and training, and develop their own infrastructure, so that they are able to move available social labour-time towards industrial production, as well as primary production.

That shift is partly what the gold price crash is telling us. Along with the crash in gold prices, silver and copper and other industrial metal prices fell sharply. The spark for that has been the slow down in growth in China, which today acts as proxy for global growth prospects. However, that should not be interpreted as in any way giving comfort to the catastrophists.

In July last year - A Reply To Paul Smith - I replied to the catastrophist warnings of Paul B. Smith. Paul had argued that growth in China was not real, and was in any case about to fall to 4.5%. Like all the other warnings of the catastrophists that the end of the world was nigh, the day came and went, and the world kept turning. Chinese growth has slowed from its average 10% p.a. experienced during the Long Wave Spring, but only to around 7-8%, which is still rapid by any measure, and more sustainable.

In fact, that kind of shift is typical of the shift from the Spring to Summer Phase. It means continued healthy growth, a growing volume of profit, but slowing productivity, and rising unit costs, leading to a fall in the Rate of Profit.

What the fall in gold and other prices signifies is that the supply of primary products has now risen to be able to meet demand, productivity growth is slowing, so unit costs are rising, and the rate of profit will begin to fall having risen during the Long Wave Winter and Spring. The volume of profit continues to rise, but a greater proportion of it is required to meet the needs of capital investment. The demand for capital rises relative to its supply, so interest rates rise.

Productive Capital soaks up a greater proportion of available surplus value, by issuing new corporate bonds, and by issuing new shares. The increased supply of both shares and bonds, causes share and bond prices to fall. Productive Capital also seeks to borrow more money-capital, again driving interest rates higher. No amount of money printing can change that fundamental relation of the demand and supply of capital, because all QE can do is to create more money tokens not more CAPITAL. That is why despite additional money printing since last year, the money drugs have not worked to stimulate new economic activity. They have mostly resulted in a slow down in the velocity of money, and in the sustaining of asset price bubbles. It is why the price of gold has crashed despite the Bank of Japan announcing that it was about to double Japanese money supply.

Markets are beginning to reflect that underlying economic reality, though many participants in those markets probably do not really understand why. That is that however much money is printed, the changing balance of demand and supply of capital means interest rates are going to rise. That means asset prices are going to collapse, and because they have been sustained in a huge bubble, they will probably collapse very hard. The fall in the price of gold presages a very big, very sharp fall in the prices of other assets, be they shares, bonds, or property. The longer it is before that happens, the bigger and harder the fall will be.