The Dow fell 86 points. Oil slipped to $76. Gold rose $5.30.

Does gold do anything but rise? It goes up when the news is bad. It goes up when the news is good. When doesn't it go up?

The prevailing opinion of the smart money is that gold is a one-way bet. As long as there seems to be some kind of recovery, inflation rates will rise and gold will rise too.

If the recovery stumbles, the feds will rush to pick it up with more stimulus. This will lead to even higher rates of inflation...and gold will rise.

Here at the Daily Reckoning headquarters we admit; we're unreconstructed gold bugs. We own gold. And we're not going to sell it until we can buy the entire list of Dow stocks for less than 2 ounces worth. At the same time, we're suspicious of one-way bets. They have a way of going the wrong way...

Meanwhile, the big emerging markets seem ready to add to their gold supplies. As a nation becomes rich - from the time of Solomon - it seeks to increase its gold supplies. Gold is wealth. Wealth is gold. In the old days, gold was taken as war booty. Troops in the medieval world, for example, were given 3 days to loot a city. They didn't waste their time looking for paper. Especially not the paper issued by the people piled up outside the city walls. They wanted gold. Gold was real money and everyone knew it.

Not only was gold wealth, it was also power. Remember the golden rule; he who has the gold makes the rules. In the old days, it was more obviously true. Time and time again, kings washed up - not because their soldiers were bad - but because they ran out of money to pay them. Charles V almost lost his fight against the French in Italy when he ran out of money; though he was the protector of Western Christianity, at one point he only kept his soldiers going by promising to allow them to sack Rome!

Now, the days of rape and pillage are mostly in the history books. Nations build their gold supplies by buying it. Even central bankers are beginning to wise up. For the first time in a quarter century, central banks are net buyers. India just made a huge purchase of IMF gold. And China is such a major buyer it alone could take up the entire world's production for years.

For 38 years, the world has operated on the dollar standard. Foreign nations rested their own money on a foundation of dollar reserves. The US offered its full faith and credit to back its green paper...which had been, up to then, almost as good as gold.

But between 1971, when Nixon broke the last link between the dollar and gold, and today, a lot of water has gone under the monetary bridge. Even in the '70s, investors were scared to death that the US might let the dollar go down the river. Only after "Tall Paul" Volcker stiffened his back and hiked rates up to 18% did speculation against the dollar stop. Until that happened, gold had raced up to $850 an ounce.

At $850 per ounce, the US had enough gold in Fort Knox to back 100% of every dollar of its monetary base - and more. Since then, the money supply of the US, as measured by Austrian economists, has gone up 5 times. Gold would have to go over $2,000 to equal its inflation- adjusted price in 1980. By another calculation, the price of gold would have to be over $6,000 to back-up the US money supply to the same degree it did in the '70s...

Bill Bonner
for The Daily Reckoning Australia

• Exhausted Gold Shares
• Price of Gold Today is About Where it Was 26 Years Ago
• Gold is Money
• Gold Flourishes but Silver is the Real Precious Metal Story of Late
• Gold is an Antidote to Paper

It's in the mail, dumbo.

The U.S. feds have been hard at work pushing out $110 billion of 'rebates,' designed to help Americans do what they already do best - spend money that they never earned.

The resulting spending spree comes after 7 rates cuts sent the Fed's lending rate down to only half the rate of consumer price inflation.

At the end of last week, the Fed also announced that it would allow lenders to launder their dirty car loans, student loans and credit card debt; they can henceforth use it as collateral for loans from the Fed. And this week, Ben Bernanke, guardian of the nation's money, urged Congress to take action to avoid more foreclosures.

And then, there's the promise of a "tax holiday" on gasoline for the summer.

All these measures are designed to do the same thing - make people feel richer than they really are. Thanks to the Fed's emergency low interest rates, they can borrow more money and pay less for it. Thanks to the 'rebate' checks, they can spend more money too. If the feds intervene to block foreclosures, as they have already stepped in to bail out Wall Street, people who should have gone broke can still hold their heads up...and live in houses they can't really afford.

And now, dear reader, we find that all these marvelous deceits are having an effect; they're bamboozling almost everyone into thinking things are getting better.

There's also a hidden flimflam...an even more important one. Since '95, reports Martin Hutchinson, the U.S. money supply, as measured by 'money of zero maturity,' has gone up at about 8.8% per year. The average fellow, seeing that he has 8.8% more cash - and with no knowledge of the volume theory of money - might reasonably conclude that he is richer. But when money increases faster than the goods and services it's destined to pay for, the result is rising prices. At 8.8%, U.S. money supply was increasing about 50% faster than the GDP. You'd expect prices to rise and the dollar to fall - which is exactly what has happened.

But recently, the feds have put their fabulous money machine into high gear. MZM has been going up at a 28% annual rate over the last three months.

Here at The Daily Reckoning, our theory is that the feds' inflation will goose up prices of commodities, gold, U.S. money supply and oil - but not the real economy. So far, that seems to be what is happening. The CRB commodities index is up 24% since last September. Oil has gone up 25% this year. Natural gas has risen 49%. Gold, meanwhile, has only gone up 4.8% in 2008...but this is after a correction; remember, it was over $1,000 just a few weeks ago.

As for consumer prices...the latest numbers show consumer prices rising at an 11% rate in March. This number would have been a shocker - if it had ever seen the light of day. Instead, the boys down in the basement of the Labor Department went to work on it with hammers and baseball bats; when they were finished, the number had been 'seasonally adjusted' down to only 3.6%.

But consumer price inflation is definitely in the pipes. It will start coming out of the faucets and backing up in the drains soon. Yesterday, oil - the sine qua non of modern economies - rose to a new record high of $122 a barrel. People are killing each other over rice and wheat. Farmers are sleeping in their fields to prevent thieving neighbours from helping themselves. And crooks are peeling the lead roofing off of churches in England...pilfering copper gutter pipes in Baltimore...and stealing the manhole covers in Detroit. This huge run up in prices of primarily materials has to make its way into prices for finished products - sooner or later.

And how about the economy? The latest report showed the economy growing at a 0.6% annual rate. Since the population is growing at 1%, this represents a real decline in output per person. We're getting poorer, in other words - just as forecast.

Still, all of this new cash and credit is creating its own happy disaster. People who didn't completely ruin themselves in the bubble phase are getting another chance. People who should be saving for their retirements, for example, are being encouraged to continue borrowing and spending as if nothing had changed. People who should move to a house they can afford are being encouraged to hold on to digs that that are beyond their means. Companies that should be liquidated are being refinanced and restructured on the Fed's EZ Credit. And to many people, all this looks almost too wonderful.

Yesterday, we mentioned Warren Buffett's comments - the credit crunch is over, he said.

Today, the Wall Street Journal tells us that the "housing crisis is over," too.

In a way, they're probably both right. With lower rates coming in...and fiscal stimulus checks going out...the money is flowing again. The 'crisis' stage is probably over - at least for now. But your teeth don't get better by putting off a visit to the dentist. And when the pain returns - probably in a few months - it will be worse than before.

That's why we continue to advise our dear readers to protect your wealth and assets now...because the initial crisis may be coming to an end - but the aftershocks will be felt throughout our economy for months (or years) to come.

It's always best to be prepared...learn how you can make the best of this topsy-turvy market environment here.

Bill Bonner
The Daily Reckoning Australia

• Baby Boomers Face Early Retirement With No Money Saved
• The Rich are Still Getting Richer
• We are Confident the Bull Market in Gold is Not Over
• In Europe, Banks Borrow Money and Lend it Back to the Government
• Willem Buiter Attacks Fed Policy