In a recent report, I wrote of how China was experiencing severe problems as a result of having its currency pegged to a basket of foreign currencies largely dominated by the US Dollar.

This week I find myself in San Francisco at the Hard Assets Conference. After a quirky breakfast at Lori’s Diner - a 1950’s styled eatery, I brought myself back to reality with a short walk uphill (is everything uphill in this town?) to Borders bookstore where I bought the Financial Times Weekend Edition.

A chart buried on page 18 caught my caffeine-heightened attention and I have re-produced this chart for you above. Arab Gulf nations like Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and Oman have all pegged their currency to the US Dollar. And rightly so, given the oil trade that these nations conduct in US Dollars. Problem is, if I peg my currency to yours, I have to follow your Money Supply policies. If you ramp your money supply up in an unbridled fashion, then I must do likewise.

Some time ago, the US Federal Reserve quit publishing its M3 money supply data. M3 is defined as Money outside the banking system (ie in your TD Waterhouse Account), money in your chequing account, money in your savings account, plus “other” money in circulation in the banking system. It is this “other” money that the Fed does not want us to know about, as this would allow us to calculate M3 which is a truer measure of inflation than what Government statisticians are telling us right now.

Thankfully, the Saudi’s are open with their data. Do a Google search on Saudi Arabian Monetary Agency and you will find the data that I used to produce the above chart. If I look closely at the recent data, I see that Saudi M3 has risen from 417 trillion in 2003 to over 677 trillion today. Doing some simple math, I calculate that this is a compounded annual increase of 13%.

Yikes !!! .... 13%. That dear readers is a very close approximation to the rate of inflation, not only in Saudi Arabia, but also in the USA. Small wonder the Arab Gulf nations are rumbling and steaming with anger. In fact, the media gathered in Riyadh for the recent OPEC ministers meeting mistakenly overhead some intense conversation amongst Ministers who were discussing the implications of breaking this US Dollar peg and starting to accept Euro’s for Oil.

We are fast approaching a tipping point in the global economy. Arab Gulf nations and for that matter China, are not going to tolerate much more of this irreverent abuse of money supply by the US Fed. There is going to be backlash. And I assure you the contortions released on global financial markets will be painful. How then does one protect against this coming backlash? The short answer is Gold. Watch this blogspace for more information on Gold and Gold related investments going forward. Don’t wait until the tsumani is ready to roll over you. Start to take protective measures now.