Fiat Currency Failure Means: ‘In Gold We Trust’ (UUP, UDN, GDXJ, GLD, SLV, GDX, SGOL, IAU)

February 2, 2012 3:21pm NYSE:GDX NYSE:GDXJ

Kevin Kerr: No matter where you live or travel — America, Europe, Asia, South America, China, etc. — you use fiat currency, at least in one form or another.


Paper money (whose value is dependent on governments and not tied to any fixed standard such as gold) is just a fact of life.

Our wealth and financial health are determined by the amount of money in our investments, bank accounts and other holdings. But the influence goes beyond a government’s regulations, laws or other decrees.

That is, they are subject to the daily fluctuations and whims of the currency markets. And lately, those fluctuations have been volatile … to say the least.

We’ll talk about how to best protect yourself from the unavoidable dangers of fiat money in just a moment. But first, let’s take a look at just what happens when paper money goes up in smoke (and why it happens).

Graveyard of Currencies

You might have become very nervous watching your personal holdings evaporate as the underlying fiat currency — whether it’s the euro, U.S. dollar, yen, pound, franc or most others — loses value.

Around the globe, investors are scrambling to move their hard-earned wealth into a safe harbor that will provide them with real, tangible assets. It’s a simple fact that fiat currencies have proved to be relatively short-lived, and this tends to make them a very poor investment, by historical standards.

A study you might find intriguing was done on 775 fiat currencies by DollarDaze.org. In this study, it determined that: “There is no historical precedence for a fiat currency that has succeeded in holding its value.”

The study showed that 20% failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation and approaching one of the other outcomes.

Not a pretty picture at all.

In fact, the report showed that the average life expectancy for a fiat currency is 27 years, while the shortest lifespan was about one month.

History Repeats Itself, Repeatedly

One of many historical examples we can look at is from an empire that thrived … one that grew to incredible wealth and prosperity. Then corruption, greed, arrogance and, above all, currency devaluation caused its eventual fall. (No, I’m not talking about the U.S. dollar — not yet, anyway!)

I am, of course, talking about Rome, where the denarius was the currency of choice. And while Rome didn’t actually have paper money, it’s still one of the best examples of the debasement of a currency gone awry.

The denarius was the coinage of the time (at the beginning of the first century A.D.), and it was essentially pure silver.

Around 54 A.D., Emperor Nero was in charge, and the coins were reduced to approximately 94% silver. Fast-forward to around 100 A.D., and the silver content was down to just 85%.

The devaluation pattern continued after Nero, because each emperor liked the idea of devaluing the currency in order to pay the bills and increase his own wealth. This appealed to them more than actually paying those bills.

Sound familiar?

So the ugly pattern continued and, in 244 A.D., Emperor Philip the Arab had the silver content dropped to 0.05%. Around the time of Rome’s collapse, the denarius contained only 0.02% silver. The coinage was virtually worthless and basically nobody accepted it as a store of value or trusted medium of exchange.

The story of Rome is far from unique. We have lists of fiat currencies that today are simply a bad memory. One of the most stunning examples is the German Weimar Republic mark.

Inflation got so bad during this period in Germany that citizens were using stacks of mark notes to heat their fireplaces.

The tale is in the tape if we look at the historical timeline of exchange rates for the German Weimar mark to one U.S. dollar.

  • April 1919: 12 marks
  • November 1921: 263 marks
  • January 1923: 17,000 marks
  • August 1923: 4.621 million marks
  • October 1923: 25.26 billion marks
  • December 1923: 4.2 trillion marks

Given the underwhelming track record of fiat currencies, it’s clear that, on a long-enough timeline, the survival rate of all fiat currencies drops to zero. So investors are starting to realize that the only true safe haven for their hard-earned wealth is diversification … namely into the precious metals.

In ‘Gold’ We Trust

The full faith and credit of the United States simply doesn’t give the global financial markets the warm, fuzzy feeling it used to. In addition, euro-zone investors and consumers have certainly had their faith rocked by the eroding value of the euro. And around the world, fiat currencies have been shaken to the core by devaluation, low or no interest rates, and out-of-control debt and borrowing.

Not only is it no wonder that we are seeing gold and silver rise in this environment, but it is also likely that we are only at the very beginning of this cycle. This means gold and silver have much further to go.

Plus, we are seeing more and more active buying out of China, and the Year of the Dragon will surely support even more buying than usual.

The biggest surge in buying is going to be from investors who have always shied away from precious metals and have finally realized that, in today’s world economy, it’s imperative to have some exposure to precious metals — even if it’s just as a hedge for your fiat currency holdings.

Bring Your Paper Money to Life

Whether you’re a new or experienced investor in the gold and silver arena, I suggest creating a basket of different holdings in gold and silver.

Actual physical bars and bullion are certainly an element you want to consider. I suggest avoiding coins (numismatics), as this can require special knowledge and, while it can be profitable, it also carries additional costs and risk.

Key mining stocks should also be a part of a core protective portfolio, so you should consider picking two to five major gold producers with good infrastructure, mining sites and cash flow. Stick with bigger names and buy on dips.

A few key gold and silver ETFs are worth examining and adding on pullbacks, like the SPDR Gold Trust (NYSEArca:GLD) (on which we currently hold call options on in my Master Trader service), the Market Vectors Gold Miners ETF (NYSEArca:GDX) and the iShares Silver Trust (NYSEArca:SLV).

The bottom line is that the money we have in our pocket is simply paper with ink and some pictures and promises. Having something tangible that you can hold in your hand as a real store of value can be very comforting and profitable, indeed.

The question you must to ask yourself is: Can I afford not to take action on this currency risk any longer? The time has come, and I’m sure you’d rather do it now — before the next fiat currency funeral takes place!

Related Tickers: Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ), PowerShares DB U.S. Dollar Index Bearish Fund (NYSEArca:UDN), PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca:UUP),  iShares Gold Trust (NYSEArca:IAU),  ETFS Physical Swiss Gold Shares (NYSEArca:SGOL).

Best wishes,

Written By Kevin Kerr From Uncommon Wisdom Daily

Uncommon Wisdom (UWD) is published by Weiss Research, Inc.  and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid  conflicts of interest, Weiss Research and its staff do not hold  positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best  estimates but must be considered hypothetical in as much as we do not  track the actual prices investors pay or receive. Regular contributors  and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene  Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer  Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker,  Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts  offering the latest investing news and financial insights for the stock  market, precious metals, natural resources, Asian and South American  markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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