The Golden Rule: He Who Has the Gold Makes the Rules

Remember the Golden Rule: He who has the gold makes the rules.

As nations get rich, typically, they buy gold – or steal it. What else can they do? How else can they protect their wealth?

When Britain was the world’s dominant empire, it loaded up so much gold in the Bank of England that the floor collapsed. Then, power shifted to America. The United States collected its war debts and the gold went back to the U.S.A with the doughboys. In a few years, the United States had the world’s largest stockpile, in Fort Knox, Kentucky.

In 1971, Nixon announced that the United States would no longer honour foreign claims on its gold – after Charles de Gaulle insisted on turning in dollars for the metal in the 1960s. Since then, the world has operated on a dollar standard. Foreign governments stockpiled dollars, rather than gold, and trusted the U.S. Treasury to make sure their dollars didn’t lose too much value.

Alas, lose value is just what the dollar did. It went from about $1 down to 5 cents during the 20th century. But the drop was fairly gradual… and other currencies fell along with it – more or less. And the U.S. economy was so strong and so far ahead of the rest of the world, people felt safe holding the greenback, even though it was losing value steadily.

But now, two things have changed.

First, wealth is shifting away from the United States. America is no longer a growing power, but a fading one. The real money is being made in other places. The energy exporters, for example, are piling up money – especially dollars – at breakneck speed. And the Asian exporters too are making trillions.

Second, the world is losing confidence in the dollar as never before. Everyone knows the Bernanke Fed can’t defend the buck. There are too many of them. Instead, Bernanke has to try to fight the economic slump – with more cash and credit… further inflating the world’s supply of dollars.

That’s why the U.S. dollar index is at its lowest level in 35 years.

“Dollar: it will only get worse,” says CNNMoney.

This leaves the foreigners in a tight spot. They’ve got trillions worth of dollars… and the buck is falling. What are they going to do?

The answer is: what rising powers always do – buy gold. The price of the yellow metal has been in a bull market for nearly 10 years – a bull market that began almost precisely on the day, in 1999, when Gordon Brown sold English gold at a 20-year low in the gold price. Since 2001 gold has risen 240%. Since Sept. 18th, when Ben Bernanke his 5 rate cuts, it has dropped 36%. Like individuals, nations want to preserve their wealth; for the past decade gold has been the best way to do so; even central bankers are catching on.

Russia and Qatar are buying heavily. Qatar is using its oil revenues to buy a tonne of gold per month. Russia is buying three or four times as much, and now has more gold in stock than the Bank of England.

China is said to be buying too – but very cautiously. China has so many dollars, if it wanted, it could buy almost half of all the gold ever mined.

Looking ahead, it is hard to see what would stop gold now – except a worldwide financial meltdown. Some commentators insist that Western governments will sell their gold to take advantage of the high price. The IMF has already been cleared to sell nearly $100 million worth – to cover its budget shortfalls. But with the price rising… and the inflation pumps working round the clock… what central banker or treasury secretary is going to want to be the one who sells the family’s silver now?

Pad your portfolio with the world’s favourite yellow metal.

Bill Bonner
Markets and Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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