It’s happening.

Where are the surplus countries to cut their wealth? Forget the euro, and sterling. The dollar may be enjoying its last hurrah. China absolutely does not want the yuan to fill that role. That leaves a certain yellow metal.

According to the FT, Saudi Arabia’s reserves of gold are twice the size we previously thought.

The pink ’un said evidence is pointing to “the revival of bullion as part of emerging economies’ official reserves.”

The snag with gold is this. If the money supply is determined by the amount of gold in existence, then growth can stall permanently. Innovation can be suffocated. The rich stay rich, the poor stay poor. For centuries, while gold made up the money supply the world changed at a snail’s pace. There are some who say this was a good thing. But they are fooling themselves. In the days when gold was money, poverty, mass starvation and misery were the staple diet for all but the ruling classes across the world.

The discovery of gold in the New World by the Spanish led to a rush in the growth of the money supply which led to inflation and killed Spain’s economic dominance. But the same discovery of gold in the New World funded the industrial revolution in the US.

In short, during the days when gold ruled, economic growth was determined by how busy were the gold miners.

Now bring the debate more up to date.

During the late 1990s and the noughties, the global savings glut ultimately meant money found its way into property. Property owners borrowed against rising asset prices, so economic collapse was avoided. The bubble burst.

Then money found its way into government bonds. Governments used rising bond prices to fund their borrowing, and economic collapse was avoided.

If the bond bubble bursts, gold may be next.

And that could be curtains for the economy.

Only if measures are taken to deal with the savings glut, can the underlying problem be fixed.

© Investment & Business News 2013