Gold is rising - but be warned: it's not a one-way bet

I don't suppose Robert Zoellick, after spooning down his morning cornflakes, heads for the office wearing a tinfoil hat. The World Bank boss's recent musings on gold, though, were welcomed by the fringe who believe a secret, possibly alien, cabal is trying to take over the world.

He told the Financial Times recently that a new system was needed to "consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

Mr Zoellick's comments startled economists and brought a frenzy of excitement to men living in their mothers' basements everywhere.

Ever since the US abandoned the gold standard in 1971, conspiracy theorists have lived in fear that a New World Order is upon us. The delinking of gold from currency was the first step in creating a system that allowed financial institutions such as the World Bank, International Monetary Fund and US Federal Reserve to take over the global economy, they believe, and placed our fates in the hands of a small cabal of shady men who manipulate world events. Quite how this happened requires some explanation.

Gold has been a store of value for thousands of years, first recorded in the Middle East before civilisation spread elsewhere. It was hard to find, which meant peasants could not easily dig it up and upset the local potentates. Nor would it tarnish, or rot, so it could be passed from generation to generation. It could even be a source of pride, draped on a rich man's wife as a symbol of prosperity.

In modern times, it was used to underpin currency and support the fiction that dollars, rubles and pounds were actually worth the paper they were printed on. It provided stability and kept inflation in check.

Unfortunately, it was also a huge brake on economic growth. By the late 1960s, the US economy was growing faster than its bank balance and needed more cash if it was to avoid stagnation. But gold is a finite resource. The biggest source of bullion at the time, South Africa, could hardly keep up with demand. It was time to set the dollar free.

The US president Richard Nixon did this did and, as a result, the US economy flew unbound. But the price of gold fell and quickly became relegated to a pretty relic, coveted only by rappers and dwindling numbers of private investors.

Of course, there was a price to pay for this - inflation. When printing presses and not bullion form the basis of an economy, countries soon become tempted to make their wealth. Germany tried to outprint its war debts. More recently, Zimbabwe attempted to do the same.

And, of course, the "quantitative easing" now being employed in the US - a euphemism for mass-dollar printing - would not be possible in a gold-based economy. It's the money-from-nothing mindset of the current fiscal regime in the US that has brought the issue of the gold standard from the blogosphere blinking into the light.

"An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions," Alan Greenspan, the former Fed chairman, said a while back, in one of his less obscure pronouncements. "They seem to sense ... that gold and economic freedom are inseparable."

Ron Paul, a senior Republican, has openly questioned whether the US gold reserves at Fort Knox exist at all and has demanded an audit of the Fed's bullion stash.

Mr Paul, and many like him, suspect that eliminating gold was a method to remove power from citizens and give it to bureaucrats. He may not believe in the New World Order, but his suspicion that printing money to outspend the fiscal crisis benefits a few at the expense of many is being picked up by people of a wide variety of ideologies.

Gold has, of course, come into its own in recent years after decades of neglect. At more than US$1,400 (Dh5,141) an ounce, and predictions that it could go much higher, it seems now is the time to buy coins, trinkets, bars - anything that will help pay the bills in the coming apocalypse.

But be warned. At the end of the day, gold, like Google shares, oil and property, is not a one-way bet. Expect a day to come in the future when Messrs Paul and Greenspan will cough, pull distractedly at their ears and try to change the subject when reminded of their outbursts on gold.

Gavin du Venage is a business writer and entrepreneur based in South Africa. If you have any questions about this column, e-mail him at [e-mail]

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