Behind the soaring price of gold - Ernest Mandel

mandel money gold

On the money-commodity gold, in 1980.

(reproduced for reference only).

Source: Intercontinental Press, New York, vol. 18, nr. 5, pp. 120–27, 11 February 1980. Written 5 January 1980.

The dizzying rise in the "price of gold" is generally attributed to two factors: the decline in the purchasing power of the dollar and speculation fueled by "political uncertainties." In other words, it is attributed to anticipation that there will be future even more pronounced depreciations of the dollar and other paper currencies used internationally as means of exchange and payment.

No one will deny that this interpretation contains elements of the truth. But when boiled down to its elements, it is clearly insufficient to explain the apparently unlimited rise in the "price of gold," as expressed in paper dollars.

What is most striking is the disproportion between the two indexes. In 1979, the rate of inflation in the United States was 13% while gold went up 100%. Since 1971 the purchasing power of the dollar has declined 70%, but the "price of gold" has increased more than ten times, that is, more than 1,000%.

Gold is a commodity, a product of human labor like all other commodities. A fraction of the available overall capacity to perform labor (that is, of the available overall productive resources) is devoted to its production. To believe that its "price" (in paper money) can depart totally and for an extended period of time from its value (i.e., that it can change in relation to the price of other commodities, without any link to the development of productivity of labor in the gold mines relative to productivity in industry and agriculture) is to believe that the "speculators" can prevent the law of value from operating. This obviously contrary to the fundamental theses of Marxist economic theory.

Some who explain the rise in gold by inflation and speculation add a full-blown conspiracy theory. They say that American imperialism has deliberately provoked the situation by continuing to inundate the world market with increasingly devalued dollars, the aim being to redress at low cost (for all practical purposes, the printing expenses incurred in producing more dollars) the big deficit in its balance of payments.

This explanation presupposes that the imperialist leaders are ignorant nearly to the point of unconsciousness. For it is clear that the rise in the gold market has become an additional factor — and no small one — in the modification of the interimperialist relationship of forces, to the detriment of the United States. It is therefore necessary to uncover the fundamental and more complex causes for the increasingly rapid rise in the market for gold. The answer lies in the transformations that have occurred in the structure of "late capitalism" in the last few decades, as well as in the forms that have been taken by the long depression in which the international capitalist economy has been mired for the last few years.

The Dual "Market for Gold"

Gold is first and foremost a commodity like any other, a product of human labor. But gold is also a particular kind of commodity, different from all the others in that it is the commodity that has been adopted as the universal equivalent – that is, as the exchange value of all commodities, as the universal money of the world market.

In its aspect as a normal commodity, it is subject to all the laws of the market. If the price of gold watches or jewelry becomes excessively high, sales of such items would decline, leading to a drop in production and to a movement of jewelry and watch capital to other sectors of the economy.

But in its aspect as the commodity of general equivalence, there cannot be any "decline in the sales of gold." Any additional quantity of gold actually produced will always find a buyer, not for use as raw material in the luxury industries but because of its aspect as universal money – either to be placed in circulation, to increase the reserves of the central banks, or to be hoarded by individuals.1

This apparent contradiction between the two use-values of gold – as the raw material of the luxury industries and as the universal money (i.e., as the basis of the entire system of paper currency and credit) — is normally no problem so long as the international monetary system is formally based on either the gold standard or the gold-reserve currency standard, with the reserve currencies being convertible into gold. Under these circumstances the central banks set a stable purchasing price for gold. And since they have sufficient resources to ensure that it is respected, a single price for gold reigns in both the private and institutional (relations between central banks) market with a narrow margin of fluctuation between the two.

This does not at all mean that the central banks have exempted the goldmining industry from the law of value. It simply means that capital that cannot obtain an average rate of profit at the price of gold set by the central banks is withdrawn from the gold industry. The less profitable mines are shut down and the profit differential obtained by corporations that exploit the richest mines continues to fluctuate according to ups and downs in the relative costs of production — always, however, in accordance with the fixed price set by the single buyer: the central banks.

The gold-mining industry, in other words, does under these circumstances remain subject to objective economic laws. But these laws are applied not through fluctuations in price but through fluctuations in production and in the profit differential.

On the whole, this is how the system functioned until 1971. It is true that since 1968 the "gold pool" – the means by which capitalist central banks sought to control the price of gold on the free market – has ceased to function and that a growing gap has been established between the price of gold on this "free market" and its price on the institutionalized market within the International Monetary Fund and between the central banks. But this gap was minimal in contrast with the sharp rise in the "price of gold" that followed.

The beginning of this rise can be fixed precisely — the decision by the Nixon administration in 1971 to eliminate the dollar's convertibility to gold. This decision totally changed the nature of the gold market. Once the central banks stopped buying current gold production at a price fixed in advance, gold-the-universal-equivalent became a commodity that in any quantity automatically found a buyer in the market.

The situation changed from one of monopsony (a single buyer) to one of monopoly. The laws of mining profitability applied. The value of gold was now determined by the mines exploiting the least profitable lodes. That meant an increasingly rapid rise in the value of gold, for as the price climbed (following value) less and less profitable mines, which had previously been closed, reopened. This automatically brought about an increase in the value of gold, as well as an increase in the profit differential of mines exploiting the richest lodes.

"Since 1889, when the first mine was dug in the rich, gold-bearing rock of Witwatersrand, there has never been a year to match 1979 for the planning, construction, and opening of new mines in South Africa" (Neue Zürcher Zeitung, October 10, 1979).

"A second gold-rush is beginning to occur in the West." (New York Times, July 28, 1979).

In other words, the inconvertibility of the dollar and the attempts to "demonetarize gold" have eliminated the ceilings that limited the production of gold through a price fixed by the central banks. The production of gold is tending to increase, which means an increasingly rapid rise in its value, determined by production costs in the poorest mines.

Far from defying the labor theory of value, the sharp rise in gold is explained by applying this theory in conditions of unlimited demand (structural shortage) as Karl Marx did in volume three of Capital, particularly in the section on ground rent.2

When we say that the production tends to increase, this should be understood in a relative, and not necessarily absolute, sense. For it could also mean that the production of gold will tend to decrease less than it would have decreased at a purchasing price set by the central banks. This explanation is confirmed by two groups of data. The first is the price of gold, which shows clearly that the real point of no return in the evolution of the "price of gold" was the moment at which inconvertibility of the dollar was declared (see graph on London gold prices).

The second concerns the evolution in the profits of the South African gold mines that exploit the relatively richest lodes. In 1978, these profits leaped 65% in comparison with the year before. (Banque des Règlements Internationaux; 49th Annual Report, June 11, 1979, Basel, Switzerland.) An increase of the same proportion is predicted for 1979. (Neue Züricher Zeitung, September 18, 1979.)

The profit differential of the mines that exploit the richest lodes is increasing at a dizzying rate. One example is the St. Helena mine, where costs of production are about $100 per ounce. The superprofits that this makes possible when the sale price is $400 an ounce (as it was last year) is easy to calculate, not to mention what happens when the sale price reaches $500 or $600!

A third set of data could be added, the increase in the worldwide production of gold, previously in a longterm decline. It is true that at first glance this date is less conclusive, because the increase is more modest. Gold production was 955 tons ins 1975 and rose to only 1,070 tons in 1979.

But it should not be forgotten that reopening old mines takes time and that the additional quantity produced in the least-profitable mines in no war determines the evolution of the value of gold. If the ounce produced under the least profitable conditions finds a buyer, that is sufficient to assure its owner the average rate of profit – that is, to have his costs of production determine the value of gold.

Value of Gold and Price of Gold

The rise in the "intrinsic" value of gold and its determination by the costs of production in the least profitable mines, in accordance with the transformation of the market for gold, is therefore an initial objective element explaining the soaring "price of gold" as expressed in paper dollars. But it is not the only one.

In a system of metallic money that is, in a system in which all money is gold, the term "price of gold" makes no sense. Price is the monetary expression of value. The "price of gold" would be the value of gold expressed in ... gold – an ounce of gold is equal to an ounce of gold.

Things are different in a system of paper money. Here the term the "price of gold" expressed in paper currency is in reality the reciprocal of the quantity of gold each unit of currency effectively represents. The formula "an ounce of gold is worth $35" would thus mean in reality that a dollar represents 1/35 of an ounce of gold.

In a system where enforced circulation of paper currency is combined with a process of permanent inflation, the rise in the "price of gold" will of necessity reflect the depreciation of the currency. When excessive issuance of paper money, combined with excessive inflation of bank credits, creates a situation where an ounce of gold is no longer represented by $35 but by $100, the price of gold in paper dollars must triple – all other things remaining equal.

But in the long term other things do not remain equal. If the cumulative rate of inflation over thirty to thirty-five years is 300%, this applies to the average increase in the price of all commodities. However, while there are indexes of the average rate of increase in the productivity of labor in industry and agriculture. It would be surprising if the gold-mining industry were to show a similar or identical rate of increase.

For obvious reasons, linked to the natural conditions under which gold is extracted from the earth, labor productivity in the gold mines will have a tendency to increase at a slower rate than in contemporary industry and agriculture. This rule is broken only when very large gold fields or hoards, new and rich, are suddenly discovered. This has happened only three times in the history of capitalism: in the sixteenth century, with the gold of Mexico; after 1848, with the gold of California; and after 1890, with the gold from the Rand, in South Africa.

When labor productivity increases less quickly in gold mines than in industry and agriculture (and all the more so when it declines), the same quantity of gold will exchange for a growing quantity of steel, textiles, wheat, and so forth. (Or, and this amounts to the same thing, the same quantity of industrial and agricultural products will exchange for a decreasing quantity of gold.) In this situation there is an increase in the relative value of gold in relation to other commodities.

Inflation in paper money obviously can mask a decline in the value of commodities. When we say that the index of average prices has increased 300% but that in the same period the relative value of gold has doubled in relation to other commodities (the productivity of labor in gold mines having increased only half as rapidly in gold mines as in the rest of industry), the "price of gold" expressed in paper dollars can be expected to climb 600%, without even taking into account what happens in the sphere if gold production (that is, without taking into account the widening of production through the exploitation of increasingly marginal mines).

In schematic form this application of the labor theory of value can be represented in the following terms:

Initial situation: One ounce of gold equals one ton of steel equals one day of labor.

The price of the ounce of gold and the ton of steel are both $20.

Thirty years later: One ounce of gold is produced in 1/2 day's labor.

One ton of steel is produced in 1/4 day's labor.

One ounce of gold equals two tons of steel.

The price of a ton of steel equals 1/2 ounce of gold, that is $60, given an apparent rate of inflation of 300%.3

Once ounce of gold now represents $120 (this is its "price" in depreciated paper dollars).

The six-fold increase in the "price of gold" is therefore the product of the average rate of inflation and of the increase of the value of gold in relation to average value of other commodities.

The increase in average productivity industry and agriculture between 1910 and 1980 can be roughly estimated at about 800%, in contrast with a figure of only about 250% in the gold mines of South Africa. The appreciation of gold in relation to the average of other commodities is therefore roughly 300%. The average rate of inflation in the United States between 1910 and 1980 was in the neighborhood of 750%. The "price of production of gold" expressed in depreciated dollars should therefore be 22.5 times $20, or $450, taking into account the entry into production of marginal mines. (The "price of gold" in 1910 was $20 an ounce; it had remained stable for nearly a century prior to the devaluation of the dollar in 1934, which raised it to $35.)

Finally, it must be kept in mind that in the capitalist system market prices are never identical to the value of a commodity (or more precisely, in the case of gold, to the price of production in the least profitable mines), but oscillate around this value, influenced by fluctuations in supply and demand.

It is a fact that for twenty years the demand for gold in the private sector has increased faster than the supply. This is due above all to the rise in industrial requirements (but an element of hoarding intervenes here as well, for a considerable proportion of the gold jewelry produced is purchased with this in mind). It is also due to private hoarding, which has now reached the level of several hundred tons a year.

To these two long-term factors has been added since the early 1970s, a third: the accumulation of enormous holdings in fast-depreciating paper dollars by private capitalists and public institutions outside the United States. Now, part of these holdings represent a growing potential or effective demand for gold, in face of a more or less stable supply.4

Table I
Dollars Held Outside U.S. (In Billion)

Early 1973. 100
3rd Quarter 1974 150
End of 1975 180
End of 1976 200
End of 1977 270
End of 1978 340
End of 1979 380

The total holding of dollars by non-Americans has risen steadily since the 1960s. But the genuine explosion in these holdings did not occur until after 1973. Table I roughly indicates the evolution of net eurodollar holdings, to which must be added in 1977, 1978, and 1979 some $100 billion deposited in offshore banks (no one knows the exact figure).

The main holders of these dollars are the central banks of some of the OPEC countries, along with the central banks of the main imperialist powers, excepting the United States.

When we say that a part of these holdings represent a potential or effective demand for gold – and only a part! – it is for a very simple reason. The fall in the exchange rate of the dollar has to remain much lower than the rate of increase in the "price of gold" for holders of large reserves of dollars to become interested in speculating against the dollar. Consider the following examples:

If Kuwait sells $1 billion against fold, and this produces a 10% drop in the exchange rate of the dollar and a 100% increase in the "price of gold"

– and if the central bank in Kuwait had begin with a total holding of $ 10 billion in dollars.

– its net gain would be $100 million.

(The $9 billion it still held in dollars would have depreciated by $900 million, while the $1 billion it had transferred into gold would now be worth $2 billion).

If, on the other hand, a sale of $5 billion against gold produced a fall in the exchange rate of the dollar of 90%, even an increase of 150% in the price of gold would still result in a significant overall loss. At the end of the year the $5 billion in dollars would be worth only $500 million, while the $5 billion sold against gold would be worth $7,5 billion – for a net loss therefore of $2 billion.

So the big holders of dollars have an interest in buying gold only within limits that will not set of a collapse in the exchange rate of the dollar. The behavior of the central banks of the OPEC countries holding surplus dollars (Saudi Arabia, the Arab Emirates, Kuwait) has for the last year or two corresponded exactly to these calculations It is their purchases (made through the intermediary of West German and Swiss banks) that have swept up the bulk of the gold sold by the International Monetary Fund, the U.S. Federal Reserve, South Africa, and the Soviet Union.5 But they have carefully refrained from throwing all the dollars they hold onto the market.

Given this enormous supplementary demand (a mere 10% of these accumulated holdings would represent tens of billions of dollars) in a situation of relatively inelastic supply which, in the best of cases increases only very slowly, there has been a brutal break in the equilibrium between supply and demand and a tendency for the "price of gold" to increase far beyond its value (the price of production).

This is the fourth and final element in the explanation of the soaring "price of gold," alongside the transformation in the market, the relative appreciation of gold in relation to the commodity average, and the situation of permanent inflation.

But even this factor does not merit the designation "speculation," for what it involves is nothing more than a classic economic mechanism. "Speculation" properly speaking— that is, the element of anticipation — plays only a marginal role in the rise of gold, occupying fifth place among the factors that explain it.6

Since the rate of increase of gold surpasses – by far – the rate of inflation of the main currencies, the value of the annual sale of gold (current production plus the fraction of world reserves offered for sale) will sooner or later surpass demand (current demand plus that part of accumulated dollar holdings converted annually into gold).

At $600 an ounce, the 1,500 tons offered annually on the market (some 45 million ounces) are already soaking up some $27 billion in paper dollars. In 1978, the OPEC countries' accumulated dollar surplus was only $7 billion. It is true that the figure rose to $65 billion in 1979, but nothing says that the increase in the "price of gold" will stop at $600 an ounce ...

The relationship between supply and demand will therefore not evolve indefinitely in the direction of the price of gold remaining largely disconnected from the intrinsic value (the price of production). The "price of gold" may once again fall, without obviously ever returning to $35, $45, or even $100 an ounce. We should remember that there has already been a precedent for this – between the end of 1974 and the autumn of 1977 the "price of gold" dropped from $200 to $125 an ounce.

Increase in 'Relative Value' of Gold Has Two Roots

In explaining the appreciation of gold in relation to the average of other commodities we have stressed the natural causes of the slower growth in the rate of labor productivity in gold mines, relative to the average increase in industry and agriculture.

These were the following: the gradual exhaustion of the richest lodes; the need to dig deeper and deeper to continue production; the longer and more costly exploration required to find profitable new lodes; the rising costs of introducing new technology; and so forth. But to these natural causes we must now add the social causes.

The gold-mining industry in South Africa has carried off the "economic miracle" of maintaining the wages of Black workers practically unchanged for threequarters of a century.

Variation, if any, has been strictly downward.7

The entire secret of apartheid and all the fundamental responsibility of imperialism for this inhuman system is evident in these figures (see Table II).

Table II
Real Earnings* of Black Workers in South African Mines

1911 111
1921 77
1931 91
1936 100
1941 93
1946 100
1951 93
1956 96
1961 96
1966 107
1969 108
*Wages plus food.
Source: Francis Wilson, Labour in the South African Gold Mines 1911-1969, (London: Cambridge University Press, 1972), p. 66.

According to South African economist Francis Wilson, the exchange-value of Black miners' wages (in cash and food rations) was 199 rand in 1969. In 1961 it was 146 rand, as compared to 338 rand for the average annual wages of Black construction workers and 370 rand for the average annual wage of Black workers in manufacturing. Wilson adds the following analysis, which admirably the connection between starvation wages and the apartheid system:

Lower wages can be paid in so far as the rural base provides supplementary income for the oscillating (temporary) workers .... In 1961 a major group estimated that to provide a black mineworker's family with adequate food, housing and fuel in the urban area would cost another R180 per annum. Furthermore, community services, including medical facilities for families, were estimated to cost R20. The average cost of recruiting was of the order of R30 per worker per annum. Thus by employing migrant rather than stabilised labour, the group, which may be taken as representative of the industry as a whole, saved a total of R170 per worker per annum (that is, reduced starvation wages by at least one-half— E.M.). . . .

One very important benefit to the industry of the oscillating system, given the socio-political framework within which it operates, is the tighter control of labour, and hence minimisation of industrial unrest which it makes possible in the short term. 8

It is clear that working conditions in the Rand gold mines are of a semi-slave character.9 The evolution of wages noted above obviously in no way reflects the price of labor power sold by free workers on a free market. But over time these conditions have come into conflict with the changing economic realities of a South Africa on the path of rapid industrialization, and with the new social and political realities of Black Africa. It became increasingly difficult to recruit South African labor for the Rand mines. A gradual substitution had to be made, bringing in laborers from the neighboring countries of Botswana, Lesotho, Malawi, and Mozambique.

But as anti-imperialist sentiment increased throughout all of Africa, including in the countries bordering South Africa, these sources of labor began to dry up as well. It then became necessary to begin increasing the wages of the Black miners, to make it possible to recruit laborers inside South Africa itself. And increase in labor costs ensued (stemming also, in part, from international inflation imported into South Africa – that is, from the depreciation of the dollar against gold, which caused an increase both in the price of products imported by South Africa and in the cost of producing gold).

The wages of a Black miner, working as part of a team rose from 8 rand in 1970 to 16 rand by the end of 1974. (Neue Züricher Zeitung, November 30 - December 1, 1974.)

Paradoxically, despite the apartheid regime and imperialist control over South African mining production, the appreciation of gold in relation to other commodities reflects, even if in an indirect manner, the effects of the colonial revolution – that is, the modified relationship of forces between imperialism and, in this case, the anti-imperialist social layers throughout the world.

This change in the relationship of forces has in part been taken advantage of by the bourgeoisie (and the other possessing classes) in semicolonial countries. As is the case in the OPEC countries, the South African bourgeoisie and the South African states have profited from the appreciation of gold, which in essence constitutes a form of redistribution of worldwide surplus value between the imperialist bourgeoisie and the bourgeoisie in the semicolonial countries. (And, in the imperialist countries themselves, between the monopolies that have most of their holdings in manufacturing and those whose holdings are concentrated in such raw materials sectors as oil, gold, diamonds, silver, uranium and so forth.) But the South African workers also benefit a little from this redistribution.

Transformation of International Monetary System?

The explosive increase in the "price of gold" has had a dramatic impact on the international monetary system, one that was furthermore easily predictable except for fanatic partisans of the "demonetarization" of gold, who take their wishes for reality.

Despite the increase – the highest yet – in the amount of petrodollars in circulation, 1979 was the first year in more than two decades in which the proportion of gold in central bank reserves increased more than the portion of dollars and other reserve currencies (that is, if the value of the gold reserves is determined according to the average market price, not the fictitious price of $45 an ounce; see Table III).

Table III
Total Value of Exchange Reserves of Central Banks (millions of current $) |Value of Gold Reserves at Current Market Price (millions of current $) | Gold as Percent of Total Reserves

1928 $13.01 $9.8 75.5%
1938 27.8 25.9 93.1
1951 56.6 35.6 63.0
1955 62.6 37.6 60.0
1960 74.2 40.5 54.6
1966 72.6 40.9 56.3
1970 92.5 41.3 44.8
1975 288.9 127.8 44.2
1976 309.7 123.3 39.8
1977 415.7 172.9 41.6
1978 471.2 185.6 44.2
1979 710 420 59.1

An ounce of gold was valued at $20 in 1928, $35 from 1938 to 1970, $125 in 1975 and 1976, $150 in 1977, $175 in 1978, and $400 in 1979. These are obviously very rough approximations, whose sole aim is to indicate an order of magnitude after 1975. An exact annual average is impossible to calculate, given the problems of estimation for which the data is lacking. To render the figure comparable, we have not taken into account IMF holdings since 1951, and special drawing rights (SDRs) since 1976. But the weight of these two categories of holdings is insignificant. At the end of 1976 they represented less than 4% of overall exchange reserves.

If the increase in the "price of gold" in 1980 or in 1980-81 were to continue at the same rate as in 1979 (a 50% increase a year, in place of the current 100%) — something not very probable but also not totally out of the question — we would have a situation close to that in 1928. That is, close to having the main imperialist currencies covered by an amount of gold equal to or above that considered necessary to assure the convertibility of paper money into gold, even if inflation continues at the present rate.

In short, everything is happening as if the steep rise in gold constituted an objective, automatic mechanism through which the law of value – that is, the objective laws that regulate the (capitalist) economy – takes its revenge on the manipulations and "political economy" practiced by central banks, states, and monopolies.

This is all the more true in light of the fact that the distribution of gold reserves among the main imperialist powers is little by little approaching the share of each of them in world exports (the share of the United States is at present 16%), so long as gold sales by the U.S. Federal Reserve Bank continue at the present rate (about nine million ounces a year). In five years, everything else remaining equal, the U.S. share of gold reserves would drop to 15%. (See Table IV.)

One of the consequences of the steep rise in gold is that the United States is at present once again in a position to use gold in regulating the deficit it is running in its balance of payments, without rapidly exhausting the reserves it holds. In 1979 this deficit was only $2.5 billion. At a rate of $400 an ounce, to cover this would only be necessary to sell six million ounces of gold – a little more than 2% of the amount held by the United States. And even if the deficit were to rise to a figure on the order of $10 billion (which is highly unlikely as a general tendency and would occur only in a few exceptional years), a rise in the market for gold (taking it, for example, to $600 or $700 an ounce) would enable the U.S. to cover nearly the entire deficit by selling 4% of its gold reserves.10

We repeat Everything is happening as if the increase in the price of gold is restoring a little more "order" and "objective truth" to the functioning of the international monetary system. The lack of equilibrium that still exists in the share of gold held by the imperialist countries – too large for the United States, too small for the Bank of Japan – will be "automatically" eliminated if the imperialist powers with balance of payments deficits cover these deficits entirely or in large part with gold.

'... it may well be found that the most useful role for officially held gold is ... in easing some of the problems of official settlement (between central banks) ... A proportion of gold settlement of their balances – essentially, a willingness to supply gold in an orderly way – would correspondingly reduce the sums that would otherwise have to be intermediated through an international banking system whose capacity for recycling without limit is now widely questioned.' (Financial Times editorial, January 4, 1980.)

Table IV
U.S. Share of Gold Reserves in Capitalist Central Banks

1913 28.3%
1918 38.0
1934 43.4
1940 71.7*
1951 64.2
1955 57.8
1960 44.0
1966 30.7
1971 26.8
1978 25.7
1979 24.2
*Highest ever.

Have we misunderstood, or does this amount to an appeal from a representative of British finance capital to the American government (and to all the imperialist governments) to come to a similar solution – that is, to use sales of gold to cover a large part of their balance of payments deficits (this being the meaning of the formula "orderly way")? This is a dramatic reversal in the attitude of British finance capital, which for the last decade has been the main supporter, alongside the United States, of the unsuccessful effort to "demonetarize gold."

It is a clever move, at the same time, in regard to the relations between OPEC and the imperialist countries. OPEC has been complaining about being paid in continually depreciating dollars. "OK!" the imperialists reply. "We'll settle our deficit with you in gold, which is rising at the same rate (over the long term) as oil."

One ounce of gold equals eighteen to twenty barrels of oil, a fact that is easily explained by the similar conditions of extraction (production) for the two minerals. Furthermore, this "solution" would have the additional advantage of slowing down he rate of inflation in the United States (and by ricochet the world rate of inflation), one of the sources (not the main source, but one of them) of which is the increase in the paper dollars placed in circulation by the United States to cover its balance of payments deficit.

From the point of view of the peoples of the OPEC countries, of the perspectives for their economic, social, and cultural development, holding large reserves of gold is equally sterile and useless as holding growing dollar deposits in the imperialist banks. But from the point of view of their capitalist possessing classes, there is a difference of major significance. Holdings in dollars depreciate; holdings in gold will either conserve their value or appreciate, constituting a reserve, a treasure trove, that is more real than holdings in dollars.

Does this mean that the rise in the gold market is gradually bringing us back to an international monetary system based on the gold standard? There is a formidable obstacle to this return trip. For while the distribution of gold reserves among the main imperialist powers may gradually and more or less automatically return to a situation that reflects roughly their share of world trade, the same does not hold for the capitalist countries taken as a whole.

The semicolonial countries, which account for 22% of the world's exports, hold only about 10% of the world's gold reserves. The OPEC countries, which account for about 11% of the world's exports, hold only about 2.5% to 3% of the world's gold reserves. And even if the imperialist countries settled the major portion of their deficit with the OPEC countries in gold, with gold running at $600 to $700 an ounce, it would take a long time for their share to reach 10%.

Implicit in the present evolution is a sort of complicated dance in which the increase in the price of manufactured products exported by the imperialist countries to the "third world" leads to an increase in the price of oil (more moderate in the long term, for even with efforts to peg the price to inflation there still remains the law of supply and demand, and the imperialist countries are gradually reducing their demand for oil). This in turn leads to a parallel increase in the price of gold and therefore to its gradual redistribution to the benefit of countries that have a surplus, which permits maintaining a high level of exports from the imperialist countries to the OPEC countries and a high rate of profit for the export monopolies while at the same time slowing the rate of inflation in the west.

This dance may seem elegant and reasonable (from the imperialist point of view) as far as the OPEC countries are concerned, but from the vantage point of the semicolonial countries that do not export oil, it looks as if the dancers are about to break their necks on a floor that is too slippery by far. For these countries have a structural deficit in their balance of payments, a deficit that steadily increases as the price of oil rises. As a consequence they have no means of obtaining an additional reserve of gold and would be condemned to nearly immediate bankruptcy by a return to the gold standard— a bankruptcy that would lead to the collapse of world commerce.

The problem faced by semicolonial countries with balance of payments deficits (among which, by the way, are a growing number of OPEC countries) can be resolved only by a continual expansion of world credit – the sole alternative to an abrupt drop in their purchases of imperialist commodities. But this world credit requires a means of payment universally acceptable to the sellers of commodities and the holders of loans: that is, a "universal money" different from and detached from gold; that is, something that cannot be found in a market economy (except in the form of a paper currency undergoing continual depreciation).

Does that mean that we will remain definitively with an international monetary system largely detached from gold, that we will continue in practice with a system based on the "dollar standard"? Nothing of the sort. We are witnessing an entire series of gradual transformations that underline the declining role of the dollar in the international monetary system, and the growing role of gold:

• One central bank after another has already begun, in its ordinary accounts, to value its gold reserves according to the current market price, not the fictitious IMF price ($45 an ounce) set by agreement in 1971. The central banks that are still keeping to the letter of the 1971 agreement in calculating their foreign exchange reserves now represent a minority of the main capitalist powers and no longer a majority. It is only a matter of time until the U.S. Federal Reserve does the same.

• Inside the European Monetary System transactions in gold between central banks have been reintroduced though on a modest scale as yet. In addition, the ECU [European Currency Unit] is officially backed by gold.

• The OPEC countries are beginning to insist that the price of oil no longer be calculated in dollars but in a basket of the currencies of the major imperialist powers. This will lead to the demand that actual payment for oil be made the same way.

• The United States itself, in a radical change of its position, is pressing West Germany, Japan (and to a lesser extent other imperialist powers) to allow their currencies to play the role of exchange reserve for other currencies, alongside the dollar. These countries are resisting this pressure, because they do not want to be subjected to the speculative runs on their currencies they foresee if they were actually to play this role. Nonetheless, the share of the deutschemark, yen, Swiss franc, and florin in exchange reserves and on the Eurobond market is growing slowly but surely.

Of the $373 billion in deposits declared by the Euromarket banks toward the middle of 1979, one-quarter represented deposits in deutschemarks and Swiss francs. In addition, central banks, particularly in Southeast Asia and the Middle East, hold some $10 billion in exchange reserves in the form of yen.

• At the same time, the share of world trade carried out in dollars is gradually shrinking, albeit at a slow rate. The share of world trade contracted and paid for in other currencies is increasing in a parallel fashion. Ayatollah Khomeini's threat to no longer accept dollars in payment for Iranian oil was not necessary to set off this movement, or to gradually accelerate it. It is developing inevitably because of the different rates of depreciation (inflation) of the dollar on the one hand and the deutschemark, yen, Swiss franc, and so forth on the other.

At present, some 25% to 30% of Japanese exports are contracted for in yen, and some 75% of West German exports (but only 45% of its imports) are contracted for in deutschemarks. (Euromoney, July 1979.)

• Paradoxically, and for the same reason, the countries most interested in maintaining the "dollar standard" (with the dollar in "free fall") are the semicolonial countries with the biggest debts. For this "dollar standard" reduces somewhat the burden of their debt, permitting them to borrow in "good money" and pay back with "bad money." (With an average rate of inflation of 7% a year, the dollar loses 30% of its value in six years. This means, for example, that a $100 million loan can be paid back with the equivalent of $50 million in purchasing power.

And not only governments are behaving in this way. "The Eurobanks are tending to borrow in weak currencies and extend loans in hard money." (Journal de Genève, September 10, 1979.)

Reciprocally, and for the same apparently paradoxical reason, the main lenders – that is, the big private banks, including those in the United States – are beginning to want to get rid of the "dollar standard." It leaves them at a disadvantage, for all accelerated inflation is unfavorable to the creditor and favorable to the borrower.

Meanwhile, private banks are beginning to accept the idea of including "real values" (above all gold, but also diamonds and silver) as collateral for loans to their clients, as collateral for pension funds, and even for their own collateral. (Business Week, December 31, 1979)

Gold and the Crisis

The long depression the world capitalist economy has entered has a dual aspect, as do all capitalist crises. It is both the result of a fall in the average rate of profit and a reflection of overproduction. Monetary questions and the rise in gold are connected to the very nature of the crisis by the double link of the explosion in interest rates and the boom in the international credit system that periodically threatens to collapse it.

Domestically, the modest, uneven, and hesitant upturn in 1976-78 was possible only through a new explosion in inflation and credit. In the United States, corporate debt reached $1 trillion by the end of 1979 (40% higher than in 1975). The total public and private debt reached a total of nearly $ 4 trillion (50% above 1975). This is the fundamental cause of permanent inflation.

Although this process is still partially controllable on the national level through conjunctural policies followed by governments and central banks— given the very nature of enforced circulation of paper money— nothing comparable exists on the level of the world market. There, there is no "lender of last resort," there is no unified conjunctural policy that can be imposed by anyone.

The explosion in international debt ($350 billion for the so-called Third World countries alone) confronts international capitalism with an insoluble contradiction. It can either risk strangling world trade or it can risk the bankruptcy of several marge debtors with the ensuing enormous losses, which would pose the problem of how to spread these losses among the different factions (private and "public") of international finance capital. Not to mention the problem of how to avoid the generalized bank crash that might well lie at the end of such a foolish course.11

It can easily be proved empirically that the rise in gold, even if it is the result of inflation, stimulates for the moment in its turn the inflation of the dollar, the inflation of most paper currencies, and therefore a rise in interest rates. It is also evident that the rise in interest rates, once it gets beyond a certain point, runs slap up against a decline, stagnation, or even insufficient upturn in a slowing average rate of profit, thereby slowing down if not strangling productive investment. The hesitant character of the 1976-78 upturn, the multiplying signs of a new 1979-80 recession, are there to confirm it.

But through the very efforts to reorient international credits (the recycling of petrodollars by the private banks and for the profit of the private banks and the big export monopolies in the imperialist countries), all the palliatives through which the international capitalist system has up until now avoided another 1929-type crash are today colliding with the effects of the steep rise in gold.

We have already pointed out that given this rise in gold, along with the "free fall" of the dollar, loans in dollars are gradually becoming a losing proposition for the banks (even hoarding gold at no interest would have been more profitable over the last three years than making loans at 7%, 8%, and 10% to governments that, to top things off, may turn out to be insolvent). The gradual collapse of the "dollar standard" signals the limits of inflation as a temporary shock absorber for the crisis – that is, the limits of credit inflation; the limits of credit; the limits of "substitute markets."

The very gravity of the crisis is therefore one of the fundamental tendencies that explains the soaring price of gold. It is not first and foremost fear of continued depreciation of the dollar (and of other paper currencies), but rather the shaking of the credit system caused by the crisis – that is, by the insufficient average rate of profit and by potential and actual overproduction – that in the last analysis is the basis of the present craze for gold. Marx understood this and analyzed it more than a century ago:

So long as enlightened (political) economy treats "of capital" ex professo, it looks down upon gold and silver with the greatest disdain, considering them as the most indifferent and useless form of capital. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labour is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Not by the magnitude of their value, for this is determined by the quantity of labour incorporated in them; but by the fact that they represent independent incarnations, expressions of the social character of wealth. ... This social existence of wealth therefore assumes the aspect of a world beyond, of a thing, matter, commodity, alongside of and external to the real elements of social wealth (that is, of the mass of commodities whose use value satisfies the needs of men – E.M.). So long as production is in a state of flux this is forgotten. Credit, likewise a social form of wealth, crowds out money (gold and silver E.M.) and usurps its place. It is faith in the social character of production which allows the money-form of products to assume the aspect of something that is only evanescent and ideal, something merely imaginative. But as soon as credit is shaken — and this phase of necessity always appears in the modern industrial cycle — all the real wealth is to be actually and suddenly transformed into money, into gold and silver — a mad demand, which, however, grows necessarily out of the system itself. (Capital, vol. 3, New York: International Publishers, 1967, pp. 573-574.

One could not offer a better summary of developments over the last thirty years in both economic reality and the predominant economic concepts of bourgeois society. Keynes said that gold was a "barbarous metal." It is much more profound to state, as Marx did, that is the capitalist system that is irrational and barbarous, that leads inevitably to crises after phases of prosperity.

The periodic rehabilitation of gold, in practice and in theory, is only a synthetic reflection of this irrationality and barbarism which condemns millions of human beings to hunger and poverty, if not death, not because the world produces too little but because it cannot consume what it produces except through the intermediary of money. Today that once again increasingly means gold.


For another article from Intercontinental Press on the 1980 gold situation:

  • 1. "... at the sources of their production the precious metals are directly exchanged for other commodities. And here we have sales (by the owners of gold or silver). And later sales, again without subsequent purchases, merely bring about a further distribution of the precious metals among all the owners of commodities. In this way, hoards of gold and silver of the most various sizes are piled up at all the points of commercial intercourse. With the possibility of keeping hold of the commodity as exchange-value, or exchange-value as commodity, the lust for gold awakens. ...

    "... The hoarding drive is boundless in its nature. Qualitatively or formally considered, money is independent of all limits, that is it is the universal representative of material wealth because it is directly convertible into any other commodity. But at the same time every actual sum of money is limited in amount, and therefore has only a limited efficacy as a means purchase. This contradiction between the quantitative limitation and the qualitative lack of limitation of money keeps driving the hoarder back to his Sisyphean task: accumulation. He is in the same situation as a world conqueror, who discovers a new boundary with each country he annexes." (Karl Marx, Capital, vol. 1, (Harmondsworth, Middlesex: Penguin Books, 1976), pp. 228-231.)

  • 2. See, in particular, chapters 38-42 in the third volume of Capital. Also, more generally, chapter 10 of volume 3.
  • 3. We say an apparent rate of inflation of 300%, because this simply expresses the increase in prices in depreciated paper money. The real rate of inflation, taking into account the fact that prices have risen while value has fallen, would be somewhere between 600% and 1,200%. This provides a yardstick for the real depreciation of paper money.
  • 4. To current production must be added, apart from sales from the reserves of the IMF and the U.S. Federal Reserve (the other central banks do not seem to have sold gold), the annual sales by the Soviet Union in conjunction with its massive purchases of grain. It is the sum of these three elements that makes up the annual amount of gold offered for sale. The total has increased regularly every year since 1975, despite the rather pronounced stability in production. This increase is due to sales by public institutions in the west (rising from 35 tons in 1975 to 325 tons in 1978 to 430 tons in 1979) and to sales by the Soviet Union (rising from 150 tons in 1975 to 450 tons in 1979). (Banque des Règlements Internationaux. 49th Annual Report, June 11, 1979, Basel.(
  • 5. Although for years the bulk of purchases made were by individuals, with the aim of hoarding, this no longer seems to be the case since the price of gold soared in 1978. See, for example, the Financial Times of December 24, 1979: "A large part of the demand for gold in recent weeks has stemmed from the Middle Easy. Part of it undoubtedly represented an attempt by official dollar holders [that is, the central banks of the OPEC countries] to diversify their reserves."
  • 6. To remain objective, it must be noted that the measures taken by the Carter administration against Iran following the seizure of the hostages at the U.S. embassy in Tehran provoked a legitimate uneasiness on the part of big holders of dollars in the Middle East. These dollar holdings are on deposit in American banks in the United States or in their subsidiaries in Europe and elsewhere. Carter seized these holdings for purely political motives. Might not the same fate strike tomorrow other country's holdings in dollars, for other political motives? Hence the desire of certain OPEC central banks to exchange their dollars for gold.
  • 7. According to Leo Katzen, in Gold and the South African Economy (Cape Town, Amsterdam, 1964), the wage costs per ton extracted were 25 shillings and nine pence in 1902 and 25 shillings and seven pence in 1946. But Black miners' wages, as a proportion of operating costs, fell from 40% in 1910 to 20% in 1969. (Francis Wilson, Labour in the South African Gold Mines 1911-1969. London: Cambridge University Press, 1972), pp. 159-160.
  • 8. Wilson, op. cit., pp. 135-136.
  • 9. The way in which this labor force is penned in guarded camps, separated by sex, underscores that this is not free wage labor in any real sense of the term.
  • 10. These figures show one thing very clearly: Although the Americans made a lot of noise about the "demonetarization of gold," Nixon's decision to make the dollar inconvertible in 1971 had the practical effect (and without doubt the real aim) of stopping the hemorrhage of gold from the Federal Reserve. But that means that they attached more importance to maintaining significant reserves of gold than all the talk about "demonetarization" would have led one to believe.
  • 11. "In the U.S. ... the Federal Reserve, the Comptroller of Currency, and the Federal Deposit Insurance Corporation last year set up for the first time a joint regulatory committee to monitor international lending activities of the major U.S. banks. ...

    "Over the past decade the leading world banks have begun to play as vital a role in the international economy as they have for long played in national economies. . . .

    "The problem then is to find ways of trying to ensure that the instability and increased risk for banks which has accompanied the breakdown of the Bretton Woods system of fixed exchange rates . . . and the challenges created by OPEC surpluses and high inflation, do not spill over into an international financial panic at some point, triggered perhaps by a bank failure or failures. ...

    "There continues to be some uncertainty [!] about the different central banks' roles as lenders of last resort to banks in difficulties. . . .

    "Another weakness of existing regulatory cooperation is that it has involved only the 12 nations in the Basle Committee, even though international banks are operating in dozens of countries, some of which have secrecy laws which make it difficult for regulators to verify the condition of the banks they are responsible for." (Financial Times, July 31, 1979.)

Posted By

Noa Rodman
May 18 2016 21:23



  • "Speculation" properly speaking— that is, the element of anticipation — plays only a marginal role in the rise of gold, occupying fifth place among the factors that explain it.

    Ernest Mandel

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