Gold Bores
The number of writers that are currently churning out books about
‘debt-enslavement’ and advocating currency-crank ideas seems to be rising faster
than the price of the average derivative. One particular group of theorists are
the ‘gold bugs’ who advocate gold as a safe-haven investment and tend to argue
that only a gold-backed currency and international trading system is likely to
stabilise the global market economy. Some hark back to the days when paper
currency was ‘as good as gold’ and could be converted into the precious metal at
a fixed rate.
Business analyst Kelly Mitchell, author of Gold Wars: The Battle for the
Global Economy (Clarity Press, 2013) seems to be part of this group. In
fairness, to those who are interested, there is a lot of fascinating (if
sometimes technical) detail in his book about the operation of the precious
metals markets in gold and silver. Part of Mitchell’s case is that the
powers-that-be are frightened that physical gold and silver will emerge as real
money again now that the currency in use across the world is fiat (token) money
not backed by anything of real value like precious metals. He contends that
economies using fiat money are prone to asset price bubbles stimulated by credit
expansion from the central banks and wider banking system.
Mitchell repeats some of the myths about the power of the banks to create
massive multiples of credit out of nothing that have been resurgent in recent
years, and also trots out some of the highly questionable quotes often used to
justify these views (see Socialist Standard October 2012 on these). He
claims the financial crisis has now laid bare the mountains of debt and
worthless paper being pumped out by banks and governments and that in order to
stop a flight towards precious metals banks and governments have been
manipulating the gold price downwards for years. This is to make it look less
attractive and credible as an alternative to paper money and credit.
Market manipulation
It is certainly true that there appears to have been short-term market
manipulation taking place periodically in the gold and silver markets, and this
is where Mitchell clearly has accumulated much knowledge and evidence. Indeed,
although Mitchell doesn’t describe it in detail here, the way the gold price for
physical bullion is fixed in London each day – long the centre of the world gold
market – is itself a gift to the conspiracy theorists. The five leading members
of the London Bullion Market Association meet at 10.30am and 3pm each day to
‘fix’ in their words, the international ‘spot’ gold price. Until recent years
this used to be done at the offices of NM Rothschild in the City of London
(enough, of itself, to get the conspiracy theorists’ pulses racing) though these
days it is done by Barclays, HSBC, Deutsche Bank, the Bank of Nova Scotia, and
Société Générale. Private tele-conferences between these banks communicate
information about demand and supply for physical gold until an average price
emerges. When representatives of the five banks concerned are happy with the
price, they each lower a miniature Union Jack flag on their desks – when all
five flags are down the price is then fixed and relayed to other markets
(including those for gold futures, options, etc).
Naturally, it is in this sort of environment that conspiracy theories
flourish and there are a fair few in this book concerning precious metals and
the power struggles around them. These include a bizarre historical one linking
the JFK assassination with an apparent attempt by Kennedy to get the US Treasury
to issue currency backed by precious metal (in that particular case, silver). A
more plausible contemporary theory is that because there are now mountains of
paper derivatives of gold, including Exchange Traded-Funds which are investments
intended to mimic fluctuations in the gold price, there may not be appropriate
levels of physical gold held by banks to satisfy the potential claims on it. In
other words, investment banks have been busy creating financial products to sell
derived from gold but which are not really backed by gold. Indeed, Mitchell and
others have claimed that it is likely that the same gold is used several times
over to ‘back’ derivatives – and that if the owners of these financial products
demanded physical gold bullion in return for their paper certificates there
would be nowhere near enough gold held in the vaults of the major banks and
central banks to satisfy the demand, leading to financial panic.
Fort Knox
Compounding this is the mystery about how much gold banks actually have in
their vaults, and about the quality of this gold. In 2009, the Chinese
government received a shipment of gold from the US only to find that when the
bullion bars were drilled they were partly tungsten, and it is thought that an
increasing proportion of gold held in bank vaults is adulterated and of poor
quality. Most major governments are very reluctant to have the gold held in
their vaults audited for volume and quality – the US government has resisted for
years an audit of the 4,600 tons of bullion it claims is held in Fort Knox.
What is for certain – and partly accounts for the title of Mitchell’s book –
is that a significant shift has been taking place in recent years in the
ownership of gold bullion. China and Russia have been significant buyers and so
have some Middle Eastern states. This in turn seems to be part of a concerted
attempt to undermine the US dollar and the American political and economic
hegemony underpinning it, by establishing alternative trading mechanisms to the
US currency. An example is that oil has been priced and traded in dollars for
decades (the so-called ‘petro-dollar’), but many states are now showing signs of
moving away from this system, including both Russia and China who have recently
signed a deal to trade oil in the Chinese Yuan. This is indicative of the US
losing its place as the dominant global capitalist power as happened to Britain
after the end of the First World War. The dollar is seen as a far weaker
currency than it has been in living memory and Mitchell claims that the lack of
real gold backing it has been part of the cause.
Interesting though it is, there are nevertheless a number of problems with
this book. One is that it is not especially well written and many of the charts
and figures included are not properly explained or even reproduced in an
intelligible way. The analytical faults, however, are even more serious. Like
many in this field, Mitchell is prone to exaggeration and overlooks evidence
which contradicts his case. For instance, if suppression of the gold price is
part of a concerted attempt by major central banks and private banks to prevent
gold emerging as an alternative to fiat currency as a representative of wealth,
this is hardly consistent with the 800 percent increase in the price of gold
seen in recent years, even if it is down on the highs it achieved in the
immediate wake of the financial crisis.
Gold standard
More seriously still, Mitchell holds totally untenable views about monetary
and trading systems based on gold (both in terms of national currencies and
earlier international trading systems like the Gold Standard). Referring to the
US Federal Reserve, he says ‘Since the Fed’s inception, the dollar has declined
over 95%, the economy has seen a series of booms, busts, crashes, asset bubbles,
and bank runs, that almost never happened under a gold standard, and
unemployment has been far greater’ (p.110-111). But apart from the decline in
the value of the dollar caused by inflation, none of this is true.
The idea that slumps, asset bubbles and bank runs didn’t happen under the
Gold Standard of international trading payments and when currencies like the
pound sterling and the dollar were convertible into gold on demand, is frankly
ludicrous. They actually happened on a regular basis including the major 1907
financial crisis in the US when JP Morgan organised a bail-out of several major
US banks that were about to fail, and of course the 1929 Wall Street crash and
subsequent Great Depression. As well as banking crises and equity bubbles and
crashes, there were also asset price bubbles in housing, land, commodities and a
range of other assets. Asset bubbles, runs on banks and financial panics were
commonplace throughout the period, and in all major countries. For example, the
UK has experienced 12 banking crises since 1800, with only four of these since
it came off the Gold Standard, while in the US the figures are 13 and two
respectively (see This Time is Different: Eight Centuries of Financial
Folly by Reinhart and Rogoff).
Mitchell has failed to understand that the expansion and contraction of the
credit system that he is fixated on, and its attendant asset bubbles, is a
reflection of the underlying trade cycle of the market economy and is not its
cause. This instead is the drive by firms to sell commodities at a profit as if
the demand for them is unlimited, leading to over-expansion of the booming
sectors of the economy. This overproduction leads to cut-backs, hoarding and
lay-offs and the monetary and credit systems are what transmits these effects
throughout the economy more widely. An example was the over-expansion of the
property sector in relation to paying demand in the US, UK, Spain and other
countries which triggered the most recent financial crisis when credit lines and
derivatives related to this turned sour. And as Marx pointed out in Capital
in relation to the many crises that have taken place when monetary systems
were based on gold, convertibility was no solution but just another means for
transmitting financial chaos:
‘[A]s soon as credit is shaken, and this is a regular and necessary phase in
the cycle of modern industry, all real wealth is supposed to be actually and
suddenly transformed into money, into gold and silver – a crazy demand, but one
that necessarily grows out of the system itself. And the gold and silver that is
supposed to satisfy these immense claims amounts in all to a few millions in the
vaults of the bank . . . with the development of the credit system, capitalist
production constantly strives to overcome this metallic barrier, which is both a
material and an imaginary barrier to wealth and its movement, while time and
again breaking its head on it’ (Volume 3, p.708).
Indeed, whether the market economy operates with a monetary system tied to
gold or not is effectively irrelevant so far as its underlying trade cycle is
concerned as this cycle occurs irrespective of the precise monetary conditions,
which influence the surface froth and bubble but little else. It therefore
follows that tinkering with the monetary system is illusory as a solution to
this problem of periodic booms, crises and slumps. In fact, it is partly because
the international Gold Standard and also convertibility of notes did not solve
these very problems (and in the minds of many economists even exacerbated them)
that they were abandoned.
The only change of significance since token money (paper notes, etc) has not
been convertible any more into gold at a fixed price has been that this has
allowed a massive expansion of the note issue to take place. Over time, gold as
a real store of wealth and a product of human labour became the means by which
all other commodities and services produced by labour could be measured – in
this sense it was ‘real money’. If paper tokens were introduced to circulate on
behalf of gold, representing it in fixed quantities, these paper tokens acted as
money (as ‘good as gold’) and so were representative of the social wealth
embodied in commodities more generally in the economy.
But when convertibility was suspended this allowed paper money to be issued
far in excess of the amount of gold that was representative of the wealth being
produced by society – and this phenomenon has been the source of the massive
currency inflation that has occurred across the world market economy since the
1930s, massively eroding the purchasing power of the dollar, pound and other
currencies. It means notes and coins in circulation are no longer tied in any
way to levels of production and trade in the economy. In this respect, any move
to tie paper money back to gold would in all likelihood halt inflation – but it
would do nothing whatsoever to halt the market economy’s periodic crises and
slumps, like the recent one, that have caused so much misery across the world.
Only the abolition of prices, credit and money itself can do that, enabling
social regulation of production and free access to wealth. In such
circumstances, gold will no longer be stored in bank vaults (as these will not
exist) and can instead be used productively and creatively rather than as an
object of financial speculation and power-broking. And that situation will
represent a golden opportunity for us all.
Gold Bores | The Socialist Party of Great Britain