Gold is another speculative asset class and a hedge against the US Dollar.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
This week the price of gold in US dollars hit $4000 per troy oz. This is an historic high (at least in nominal dollars). But even that high looks set to be surpassed, with investment bank Goldman Sachs forecasting $4900 per oz by year end. And the gold price in other major currencies has also been rising.
What is behind this unprecedented rally? And does it matter? Before answering those questions let’s remind ourselves of the role of gold in capitalist economies. Capitalist economies are monetary economies. Capitalists employ workers to produce goods and services for sale on a market for a profit. But goods and services are not exchanged for each other in a so-called barter system. Instead, historically, different commodities were chosen to be universally accepted as money ie as a means of exchange, a unit of account in transactions and as a store of value.
Gold eventually became that universal commodity ie the money commodity. It was ideal because it was not perishable, but malleable into coinage for exchange or ingots for hoarding; and accepted everywhere. As Marx put it: “The truth of the proposition that, ‘although gold and silver are not by nature money, money is by nature gold and silver,” is shown by the fitness of the physical properties of these metals for the functions of money.”
Gold was the main money commodity even before the capitalist system of production became dominant in the major economies. But gold soon dominated the monetary and exchange system in capitalism. Gold became the trusted measure of value. However, as capitalism expanded production to new heights, there was not enough gold or gold coinage to support the expanding flow of transactions. It became necessary to create ‘fiat currencies’ ie. coinage or paper notes (or now mainly bank deposits) issued by banks or governments that could be created without limit to meet the growth in production of goods and services.
Governments now controlled the supply of money (not the demand) and thus they could ‘force’ people to accept the national currency unit in place of gold. To avoid fiat currencies getting out of line with gold as the universal value, national currencies were usually tied to gold at a fixed price – a so-called gold standard. Traders could then have confidence in the value of the national currency, while international transactions involving the export and import of goods and services were still settled for any imbalances by gold itself.
In the 20th century, capitalism became dominant globally and fiat currencies mainly replaced gold as the means of exchange, even in international transactions and in the store of value held by companies, banks and governments. Foreign exchange reserves were now mainly in the dominant national fiat currency; the US dollar, with gold relegated to a minor role. The end of gold as the major form of money or even as the ultimate standard of value came with the decision of the US government in the 1970s to no longer exchange dollars for a fixed amount of gold. The gold standard was ended and replaced by the dollar’ standard’.
Gold was still held in national government reserves, but it mainly became, not so much ‘money’, but a financial asset, like company shares or bonds. Gold became speculative ‘fictitious capital’ for investors to buy or sell to make capital gains; more money out of money. But gold never lost its historic role in the memes of capitalists, namely as the universal commodity or money that is acceptable for all. So in periods when the value of fiat currencies appeared to be ‘debased’, hoarders turn back to gold. Gold became the financial asset to hold if the dominant fiat currency globally, namely the US dollar, started to weaken. It was going back to the relic of the barbaric past.
There have been several upward bursts in the gold price (as measured in the main fiat currency, the dollar). If economies look like heading into a slump; if inflation in economies rises sharply; if there is a risk of a financial crash – all these crises in capitalist production would mean a debasement of the national currency and internationally, the dollar. Thus gold becomes an attractive alternative to the government currency. If companies, individuals and other governments can no longer trust that the dollar will hold its purchasing power for goods and services, they start to sell dollars for gold.
This time the gold price has risen so quickly because of a number of factors. First, inflation returned with a vengeance after the pandemic slump. Accelerating inflation meant that the real return (interest) on holding fiat currencies fell even though central banks hiked up their policy interest rates. Gold does not earn interest, but with the real return on ‘cash’ staying low, gold became more attractive as a financial asset.
Then Trump arrived. Trump’s tariff tantrums created huge uncertainty about global trade and, in particular, what will happen in the US economy. And it was not clear what the Trump administration’s intentions were: did they want the US dollar to stay strong to keep import prices stable or weaken in order to boost US exports? So gold became even more attractive. The US dollar’s value against other currencies dropped by over 10% in the first six months of the Trump presidency.
But another reason for the gold rally is that the metal is seen as a hedge against Trump’s tariff measures so many central banks in the so-called emerging economies (the Global South), facing rising US tariffs decided to increase their gold reserves as dollar become less necessary in international trade.
Financial speculation gains its own momentum. Just as with the rocketing rise in the dollar price of cryptocurrencies like bitcoin, gold is another form of fictitious capital investment. FOMO – fear of missing out – is the classic characteristic of financial speculation and gold along with bitcoin ( the US stock market is now again at record highs) are in forefront of FOMO.
Where does all this end? First, it ends if the US dollar does not continue to fall – and actually since July, the dollar index against other currencies has stabilised at a level that is close to its historic average.
Second, it ends this time if the world economy goes into a slump. That would kill inflation and so boost the dollar. In slumps, the gold price can rise as an asset to hold (hoard) in crises, waiting for better times. But in its current boom, gold is increasingly driven by speculative demand. Such speculation will collapse in a slump and so will stock, bitcoin and gold prices.
Be the first to comment