He who has the gold makes the rules, which is why Asia and Arabia are buying gold today.
As nations get rich, typically, they buy gold - or they 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 20th century war debts in gold bullion, and the gold went back to the USA with the doughboys.
In a few years, the United States had the world's largest stockpile, in Fort Knox, Kentucky. And to protect that hoard in 1971, Richard 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, rather than the British-led or even post-WWII approved Gold Standard. Foreign governments stockpiled dollars, rather than gold, and trusted the US Treasury to make sure their dollars didn't lose too much value.
But alas, lose value is just what the dollar did. It lost 95% of its purchasing power during the 20th century. The drop was fairly gradual, however, and other currencies fell along with it -- more or less. And the US economy remained 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.
Now two things have changed:
Wealth is moving out of the US
The real wealth today 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.
The world is losing confidence in the dollar
People the world over are now losing confidence in the US Treasury's good faith 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 US dollar index is at its lowest level in 35 years. "Dollar: it will only get worse," says CNNMoney.
This leaves 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 they'll do 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 British gold at a 20-year low in the gold price.
Since 2001 gold has risen 240%. Since September 18, when Ben Bernanke began five cuts to the Fed funds rate, the dollar 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. And even then, what would you want to own - paper or gold?
Some commentators insist that Western governments will sell their gold to take advantage of the high price. Already the IMF has been cleared to sell nearly $100 million of gold to cover its budget shortfalls.
Pad your portfolio with the world's favourite yellow metal. Everyone else is.
Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Editor of free The Daily Reckoning email - now read by more than 500,000 worldwide - he is also the author of three best-selling investment books, most recently Mobs, Messiahs & Markets (John Wiley, 2007).
