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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.