In the early 1950s I was reading history at Balliol College, Oxford. I learnt a good deal from my tutors, whom I remember with gratitude, but even more from my contemporaries, such as Dick Taverne or Bernard Williams, the philosopher. There was, even then, no doubt who was the most erudite undergraduate, with, as it seemed, total recall of the whole corpus of European literature. It was George Steiner, the polymath whose encyclopaedic learning has been creating envy in academic circles ever since.

In the mid-1960s, I was visiting New York and met George's father, a quiet Jewish banker, who, like the great Siegmund Warburg, had been trained in the tradition of European banking of the pre-Nazi era.

He had already reached Paris when George was born in 1929. George once told me that he had been brought into the world by an American obstetrician, who later achieved fame by shooting the American populist, Huey Long, in the atrium of the Louisiana State Capital in Baton Rouge. Neither Governor Long nor the obstetrician survived.

Dr Steiner, like most good European bankers of his generation, believed in gold as the ultimate reality of the world's financial system. He told me of Franklin Roosevelt's arbitrary decision to fix the dollar price for gold at $35 an ounce, at which the official price then still stood. Dr Steiner also observed that the free market for gold, which some people still regarded as a “black market”, was at a premium to the official price. He forecast that the official price would come into line with the free market eventually.

His forecast was proved correct in 1971, when President Nixon, who had no real idea what he was doing, brought dollar convertibility into gold to an end. The gold price rose from $35 an ounce to more than $800 in the next decade.

I have been interested in the story of gold ever since. Victorian economists, writing in the period of the gold standard, used to define the functions of money. Two of these classic functions were money as a “medium of exchange” and money as a “store of value”.

As a medium of exchange, money needs to have convertibility and liquidity. Paper currencies have these qualities, so does gold. To add to the store of value, money needs to retain its value over long periods.

Gold has retained its value, though with fluctuations, over centuries. Even now its purchasing power in terms of physical assets is not far distant from 300 years ago, before Isaac Newton's recoinage of 1717. Most paper currencies lost more

than 98 per cent of their purchasing power in the 20th century alone.

My conversation with Dr Steiner was a prelude to a friendship with Professor Roy Jastram, whose book, The Golden Constant, proves statistically the long-term stability of the purchasing power of gold. I have also written or edited two books on the case for gold myself. For some years I have been forecasting that gold would rise in price to $1,000 an ounce. Last week it reached $950 an ounce. We are getting very close. I also forecast that oil would go to $100 a barrel; it has.

Why is this process happening? What does it tell us? This is happening because the world has been losing confidence in all the currencies issued by central banks, but particularly in the dollar. The last Chairman of the US Federal Reserve Board to care about the dollar as a store of value was Paul Volcker, who was the chairman of the Fed from 1979 to 1987.

He saved the dollar from collapse in the early 1980s and with the dollar he saved the world's financial system. However, Alan Greenspan, his successor, was a more political chairman of the Federal Reserve. He wanted to keep the White House happy. On the whole he succeeded in that task, at the expense of the dollar.

One can detect the decline of confidence in every part of the world. The world's two largest developing economies, economic superpowers of the future, are China and India. Both countries have a long tradition of hoarding gold, often in the form of jewellery, as a form of personal saving. The Chinese and Indian central banks already have more dollars in their reserve than they can possibly want. They know that the dollar is likely to depreciate over time.

They suspect that the American people will elect an inflationary president and Congress next November; as there is no remaining presidential candidate who stands for sound money, that seems the safe assumption. The euro may currently be a better currency than the dollar because it is still being run on sound German principles, though by a Frenchman. Gordon Brown has already undermined the pound by selling half the United Kingdom's gold reserves at about a third of the present price.

There are also supply problems likely to effect the mining of South African gold. South Africa is short of electrical power because the necessary new power stations have not been built and the maintenance work has not been done. Supplies of power to Zimbabwe have had to be halted and supplies to the goldmines have been curtailed. As a result, China is overtaking South Africa as the world's largest gold producer - which gives China an incentive to raise the gold price.

The dollar price of gold has been moving in a long cycle, up from 1965 to 1981, down from 1981 to 1999, up from 2000 to 2008. I do not expect this cycle to peak at $1,000 an ounce, though the credit crunch may give it pause. Gold is a defence against inflation. In November the Americans will elect another inflationary president.

That will be good for gold, but bad for the dollar.

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