You Dumb Kluck

Yes, gold is the ultimate money. But the Dollar's demise may contain a surprise...

ULTIMATELY gold is money, writes Bill Bonner in his Daily Reckoning.

It's a way to store wealth over the long term. Just ask Terry Herbert.

The man spent his time with a metal detector, looking for treasure in England's green and golden fields. He'd been looking for years, but when he finally found something important it "brought tears to my eyes," he says.

What Mr. Herbert found was perhaps the greatest discovery of buried treasure in English history – 1,500 different artifacts of Gold and silver...dagger hilts, crosses, helmet cheek pieces and other items of war booty from the Anglo-Saxon period, about 1,400 years ago.

Had Mr. Herbert stumbled upon some I.O.U.s from a Saxon chieftain, it would have been a remarkable discovery. Its historical value might have been inestimable. But what he found weighed in at 11 pounds of gold. In addition to the value to museums and historians, it has monetary value. Even if you melted it down, erasing all trace of its history and provenance, it would still be worth about $160,000 at today's price. And in real terms, the Gold Price "has been remarkably similar for centuries at a time," wrote Roy W. Jastram in his 1977 book, The Golden Constant.

"Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century."

Gold outlives paper money, in short – and empires, governments...all of us and all our institutions. The Chinese have metal detectors too. And they know there's not much real value behind the Dollar.

"The Dollar is finished," says historian Niall Ferguson. The Chinese are dumping it, he says.

Ferguson speaks for the popular intelligentsia. His ideas reflect those of fund managers, hedge fund operators, bankers, politicians and speculators. They're all convinced that the Dollar is doomed. The Financial Times elaborates:

"The financial crisis vividly taught investors the importance of tail risk, a massive one-off event that can crush the value of portfolios. As the dust settles, fear of another 'tail' to sting portfolios is uppermost in the minds of many investors and money managers."

Oh, Mr. Market...where's thy sting? It's inflation, they believe.

It's the risk "that the huge liquidity injections being made by central banks could spark a surge in either inflation and/or long-term interest rates beyond 2012," continues the FT.

"Inflation is the single biggest topic for discussion among our clients," says a private banker.

What's remarkable about inflation is that there is so little of it. It makes us think this story may have a twist. You remember the famous German general von Kluck, from whom we get the expression, "You dumb kluck"...?

Von Kluck was chasing the French down the Marne in 1914. Victory looked like it was close at hand. The French were pulling back. Von Kluck, who had orders to attack Paris, decided instead to pursue the French army. He was convinced that they were beaten.

All he had to do was keep the pressure on...and they would surrender.

But some of his field commanders, however, noted that they were picking up very few prisoners. Normally, an army that is beaten throws off many discouraged and confused soldiers. Since there were so few, the commanders reasoned that the French army was still intact; it was merely retreating in good order and could turn and surprise the Germans at any time.

The commanders were right. France's aging general, Gallieni, who was in charge of the Parisian garrison, realized that the Germans were making a fatal mistake. By pursuing the troops down the Marne, rather than attacking Paris, they exposed themselves to a counteract from the city itself.

"Gentlemen," he is said to have said to his staff. "They offer us their flank."

The French took the offer. They attacked. Using thousands of taxicabs, they moved troops to the Marne Valley as fast as possible and caught the Germans unprepared. The Battle of the Marne turned the German army around and ultimately cost them the war.

We bring this up now because we have a feeling that the Dollar is not broken. It is merely retreating in good order. At $1.50 per Euro, it is not at the record low you'd expect after so much negative press. And it is not giving up more ground. Instead, it is holding.

The Dollar bears are vulnerable. We wouldn't be surprised to see them hit hard in the weeks ahead. But of course, in the very long run, the Dollar bears will prove to be right. And gold remains the ultimate money.

We have little doubt that the coin shooter who finds a cache of US Treasury bonds in the year 3,400...like Mr. Herbert in 2009...will have tears in his eyes. Though perhaps not for the same reason.

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