No fiat currency has lasted forever.

In spite of constant headlines about debts and deficits, most Americans don't really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.

History has a message for us: No fiat currency has lasted forever.

Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

You might suspect this happened only to third world countries. You'd be wrong. There was no discrimination as to the size or perceived stability of a nation's economy; if the leaders abused their currency, the country paid the price.

As you scroll through the currencies below, you'll see some long-ago casualties. What's shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you've been born.

So what's the one word for the "thousand pictures" below? Worthless.

Yugoslavia -- 10 billion dinar, 1993

Zaire -- 5 million zaires, 1992

Venezuela -- 10,000 bolívares, 2002

Ukraine -- 10,000 karbovantsiv, 1995

Turkey -- 5 million lira, 1997

Russia -- 10,000 rubles, 1992

Romania -- 50,000 lei, 2001

Central Bank of China -- 10,000 CGU, 1947

Peru -- 100,000 intis, 1989

Nicaragua -- 10 million córdobas, 1990

Hungary -- 10 million pengo, 1945

Greece -- 25,000 drachmas, 1943

Germany -- 1 billion mark, 1923

Georgia -- 1 million laris, 1994

France -- 5 livres, 1793

Chile -- 10,000 pesos, 1975

Brazil -- 500 cruzeiros reais, 1993

Bosnia -- 100 million dinar, 1993

Bolivia -- 5 million pesos bolivianos, 1985

Belarus -- 100,000 rubles, 1996

Argentina -- 10,000 pesos argentinos, 1985

Angola -- 500,000 kwanzas reajustados, 1995

Zimbabwe -- 100 trillion dollars, 2006

So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.

With that in mind, consider the following:

Morgan Stanley reported in 2009 that there's "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt, including the present value of future liabilities like Social Security and Medicare, now exceeds GDP by more than 400%.

Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." On our current path, analyst Michael Murphy projects we'll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." This year's U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve's creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don't know how -- or don't wish -- to keep the currency strong.

Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we'll have to deal with, you can protect your assets with the one currency that can't be debased, devalued, or destroyed by irresponsible leaders.

Don't be the investor who dismisses this message from history. Use gold (and silver) as your savings vehicle. Any excuse you have now will be meaningless and irrelevant when we enter that fateful period. Make sure you own enough precious metals to make a difference in your portfolio.

Because when it comes to money, worthless is not a fun word.

What happen when US credit downgrade

After the debt deal is done, I think the biggest suspense of the markets is whether the U.S. will get a downgrade from its current AAA rating by one or more of the three major credit rating agencies.  Moody’s and Fitch already affirmed Uncle Sam’s AAA rating, at least for now.  Standard & Poor’s (S&P) could be the lone holdout, but some think the major rating agencies would not act in such a ‘politically incorrect’ way. So what happens if the United States does get a downgrade?

A downgrade would increase the borrowing costs. JP Morgan already estimated a downgrade would cost the U.S. government $100 billion a year. But the buck doesn’t stop there, the higher interest rate and payments would trickle down to state, local governments, business and individual as well since most loan interest rates are benchmarked against the U.S. Treasury rate.

A downgrade could also have a negative impact on the dollar driving up consumer inflation, while diminishing consumer purchasing power. Moreover, the U.S. treasury accounts for a significant portion of many portfolios around the world, as it is historically the “safe” investment. A downgrade of the U.S. bond would have a serious wealth reducing effect on a global scale. It would also derail consumer and business confidence. No investment / spending equal no new job creations, which would make the unemployment situation even worse. (See Graphic from McClatchy)  

Source: McClatchydc.com

Some economists think a downgrade would not be as traumatic since the U.S. debt/deficit problems and the possibility of a rating downgrade have been well telegraphed, and should have already been expected and priced in by the markets. So when the real downgrade comes, there would not be as much reaction. Another supporting fact–Japan lost its AAA status over a decade ago, but still enjoys relatively low interest rate.

They may have a point. Reuters quoted mutual fund data from Lipper that in the week to July 27; U.S. money market funds — which primarily invest in Treasuries — lost $32 billion, while high yield and investment grade bond funds attracted a combined $482 million. So, the markets might already be preparing for the downgrade by shifting some funds away from the U.S. bond.

However, I think the more important question is whether the markets would over-react when the new downgrade hits the news.  The debt situations in the PIIGS countries are also well known with all the data out there, but whenever there was a new downgrade from the Big 3 agencies, a market rout still ensued on whichever country in the downgrade news headline.

The S&P 500 has already been down for 7 days straight, the longest losing streak since October 2008, and crashed through the key 200-day moving average levels. The negative technical signs would suggest a potential market rout on any kind of negative news, particularly on one as historical and major as a downgrade of the U.S. sovereign credit rating.

So I think it is premature to say “a downgrade could resound in financial markets more with a whimper than a bang,” because there will be consequences to pay as discussed earlier.  

As to whether a downgrade will get handed down, politics probably plays a far more important role than whether the fiscal and debt situation of the United States actually warrants a sovereign credit rating. 

Gold correlates with chaos and we've got chaos everywhere

"You don't trade gold" right now, "Mad Money" host says amid Thursday's Dow destruction

"A lot of panic in gold today," CNBC star Jim Cramer said Aug. 4 as the Dow Jones and other major stock indices fell off a cliff, denting gold prices somewhat as traders sold to cover equity losses. "People bailing, people selling it short, people trading it every which way but loose. And I'm telling you that's all wrong. They're all wrong. I've been a bull in gold for more than a double now. And it would be greedy to stay long after such a huge run. But unless the appreciation has made it more than 20% of the personal portfolio, a real high-quality problem to have, I think you should hold on and look to buy more on weakness to bring it up to 20%. Here's why. Gold is not a commodity. It is not like oil or copper or wheat or fertilizer, certainly not fertilizer; it's a currency. In a world where currencies are going nuts and every country on earth seems to want its currency to be lower, gold is king. You can't debase it even if you tried. You can't print it. In any central bank, if any central bank wanted to ring the register, and you can't find the stuff in easy places anymore as you can tell from the gold miners. I always hear about the correlations with gold. Some say buy it when the dollar's weak. Some say buy it when the euro's strong. Some say buy it when inflation rates or deflation stalks. You know what? They're all right. Gold's been the best-performing asset in the world the last 11 years. And during that time period, we've had every one of those conditions. Gold correlates with chaos and we've got chaos everywhere. You don't trade gold on any of these. It doesn't correlate with anything other than the craziness. You can buy bullion if you can, or coins; if not, the GLD, the gold ETF, and you hold it. That's my gold strategy in a nutshell."

Central banks hint: It’s not too late to buy gold

SAN FRANCISCO (MarketWatch) — Central banks in emerging markets have decided that it’s not too late to join gold’s party.

South Korea and Mexico are among the nations whose central banks have been ramping up gold holdings lately — and they’re willing to pay the highest-ever prices for an ounce of gold to do it, even though gold’s latest rally began more than a decade ago.

Admittedly, it’s not new trend for all central banks, but one that’s speeding up as the world loses faith in the U.S. dollar and global markets. Read about Thursday’s 513-point drop in the Dow.

Click to Play

South Korea buys gold

South Korea buys gold for the first time in 13 years, the latest central bank seeking to reduce dependence on the U.S. dollar.

“The trend of greater purchases by emerging-market central banks and slowing sales by European central banks had been under way for three years, although it has accelerated of late,” said Natalie Dempster, director of government affairs for the World Gold Council.

Central banks became net buyers of gold last year for the first time in two decades, adding 76 metric tons to their reserves, she said — and in the first half of this year, they bought almost three times that amount.

In February and March, Mexico added around 93 metric tons to its reserves, Russia purchased 48 metric tons during the first half of this year, and Thailand bought 17 metric tons in June, according to data from the World Gold Council.

This week, the Bank of Korea confirmed that it made its first purchase of gold since the Asian financial crisis of 1997-1998, buying 25 metric tons of gold in June and July of this year.

The purchase by South Korea, a country which relies heavily on support by the U.S. government, is “significant, as it represents the first purchase of gold by the East Asian country in over a decade,” said Nick Barisheff, chief executive officer of Bullion Management Group Inc. “It would seem South Korea has joined the ranks of those countries that have lost faith in the U.S. dollar.”

And “it is no coincidence that many of these central banks are from emerging-market economies,” he said. “Many of these countries have experienced the grim reality of enduring a currency crisis first-hand.”

Barisheff pointed out that in the last 20 years, there have been many currencies crises: in Mexico in 1994, the Asian financial crisis of 1997, the Russian financial crisis of 1998, the Argentine economic crisis of 1999-2002 and the Zimbabwean financial crisis, which is ongoing after consuming much of the last decade.

“The emerging markets can now see what lies ahead for the United States,” he said. “Gold is the ultimate safe haven, and many central banks are diversifying out of U.S. dollars and into gold to protect their country’s wealth.”

Feeding the frenzy

The value of the U.S. dollar has certainly been a key concern for investors around the world, and that has made gold, as usual, much more attractive. Read about how to invest in gold.

“The bull market in gold is and has always been about the collapse of the dollar as a reserve currency and international facilitator of trade,” said Edmond Bugos, director of mining finance at Strategic Metals Research & Capital.

Since early June 2010, the U.S. dollar index  has lost about 15%, while gold prices are up over 30%.

”Exuberant spending and excessive debt has led the United States to a financial situation that has passed the point of no return,” Barisheff said. “A currency crisis will eventually happen, and there will be dire consequences for the U.S. dollar, which has already lost over 80% of its purchasing power over the last decade compared to gold.”

But there are other factors feeding gold’s price rally.

Central banks have been adding to their gold reserves as “a combination of rapid foreign-exchange accumulation and stagnant gold holdings has meant that gold’s share in total reserves has dropped sharply in many countries,” said Dempster.

The U.S., the world’s top holder of gold, has 74.7% of its reserves in gold, according to data from the World Gold Council, as of July.

Russia, No. 8 on the list of gold holders, has just 7.8% of its reserves in gold, even though it’s added gold to them nearly every month since the start of 2007, data show.

Global financial assets are valued at an estimated $200 trillion, but the world’s total above-ground gold has been valued at “a modest” $3 trillion, said Barisheff, adding that “about half of that is owned by central banks.”

And lately, most of the buying, though not all, is coming from emerging markets whose economic fortunes are very much tied to the West, said Peter Grant, senior metals analyst at USAGold-Centennial Precious Metals Inc.

“Many have accumulated large amounts of dollar-denominated assets in reserve and are rightfully worried about the mounting currency risk,” he said, so they can either choose to shift into assets denominated in some other fiat currency with a more reasonable risk profile, or choose to allocate into a hard asset without counter-party risk, such as gold.

“The prudent ones are increasingly opting for the latter,” Grant said. Read about gold’s investment risks.

Asian elephants

But with emerging markets, it has always been tough to figure out the “who, what, where, when and how” on gold purchases.

“Central banks are often reluctant to declare the exact state of their gold holdings and gold policies,” said Mark O’Byrne, executive director at international bullion dealer GoldCore.

“The elephant in the room is the central banks of China and India and their gold buying,” he said, though “informed analysts are confident that they are quietly continuing to accumulate gold.”

Even though China has 1,054 metric tons of gold in its reserves, ranked as the world’s sixth-largest gold holding, that’s only 1.6% of its total reserves, according to data from the World Gold Council.

“Watch China above all else,” said Dennis Gartman, editor of the Gartman Letter in Suffolk, Va. “The Chinese have a reputation for being savvy traders, but in reality they are slow to the game, and they have been.”

He points out that China could take the world’s production of gold for several years and still not get the diversification job done adequately.

“To become a major player in international finance, traditionally a central bank needs to have a large reserve in gold,” said Jeffrey Wright, senior analyst of metals and mining equity research at Global Hunter Securities.

China has actually “left the ranks of an emerging market across multiple metrics, and the amount of gold held by their central bank is one of these metrics,” Wright said.

“China, as well as Russia, do not want more exposure to unstable and depreciating assets, such as the U.S. dollar and euro. They see better long-term stability and growth prospects in gold,” he said.

Yet despite rising investment demand and purchases from central banks over the last decade, Barisheff said, gold production has actually remained flat over the last two decades, increasing only marginally by an average of 0.7% per year.

“Gold is at record highs, but for solid fundamental reasons,” said Steve Gillette, president of Cirrus Commodities Exchange. “Gold is not at a frenzied high and is not in a bubble.” 

The 2011 Gold Season is Just Around the Corner

The ongoing debate in Washington prompted increased Fear Trade activity in gold this week. The issue over raising the federal borrowing limit caused the yellow metal to remain around its all-time high of $1,600 per ounce this week.

Gold has now increased for 124 months straight, says Deutsche Bank. The rally is in its 11th year, lasting nearly three times as long as other historical rallies going back to 1971. If the metal rose to $2,100 an ounce, it would represent the most powerful percentage increase in history, according to Deutsche Bank.

I believe what’s happening in the market today is a short-term driver of gold prices spurred by ETF investments. While Deutsche Bank believes a “market friendly resolution to the U.S. debt ceiling may trigger a short-term correction in the gold price,” fundamentals seem to be in place to keep gold prices elevated over the long run. Even in many economic scenarios today, Deutsche Bank believes gold prices “appear irreversible.”

A more important driver that will keep gold prices elevated over a longer time period is the Love Trade. Marcus Grubb, managing director of investment at the World Gold Council (WGC), highlighted the significant aspects of this trend in his interview with Andrew Bell on the Business News Network (BNN). He says investors need to consider the issues outside of the euro zone, the debt-ridden countries and fiscal deficits.

More important to him is what he calls the “transfer of wealth from west to east” and the accumulation of wealth, particularly in China and India. This is what is driving the longer term strength in the gold price.

He states that the demand for gold is particularly strong in China: The country has a $3 trillion surplus, with some of it in gold, and he estimates that household wealth will most likely rise by five times. China and India also share a strong cultural affinity for gold as an investment and jewelry. For these reasons, Grubb believes this will drive gold demand.

To see the interview in its entirety, click here.

Merrill Lynch has found that there is a positive correlation between gold jewelry demand and rising with increasing wealth. The chart below shows that as the GDP per capital rises so does demand for gold.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The Muslim holy month of Ramadan begins in August and concludes with generous gift-giving in early September. Then it’s Diwali, known as “the festival of lights” in India, Christmas in the U.S., and Chinese New Year. The key to this seasonal strength over the past few years has been demand from China and India.

The spending spree has already begun in East Asia. In the WGC’s second quarter report, physical gold delivered at the Shanghai Gold Exchange was 14.65 percent higher than the previous year. Gold purchases also remained strong across East Asia, with tourists from mainland China buying gold in Hong Kong. In India, coin stocks, symbols of good fortune, were running low during the Akshaya Tritiya annual holiday in May.

Gold Could Hit $2,000 Despite Slip: Analysts

Thursday's market turmoil pulled gold lower, as speculators liquidated speculative positions, but analysts told CNBC that the longer term flight to safety could now speed up and drive the precious metal towards $2,000 an ounce.

Tom Grill | Iconica | Getty Images

Gold [GCCV1  1663.20    4.20  (+0.25%)   ] was little changed on Friday morning, following the release of U.S. unemployment data that showed hiring picked up slightly in July and the unemployment rate dipped to 9.1 percent.

Gold recovered some of the $40-an-ounce losses after it fell from record highs Thursday. The commodity had gained almost 13 percent in the previous three months, hitting record highs just shy of $1,685 an ounce.

Dennis Gartman told CNBC on Friday that the status of gold as a safe haven was under threat.

"Gold is not safe. Gold moves $40 to $60 to $80 a day, that's not safe," he said. "The U.S. dollar probably is somewhat safe, but the US dollar securities at the short end of the yield curve is probably the only safe place in the world right now."

Ben Davies, CEO of Hinde Capital told CNBC that Gartman's analysis was "nonsense."

"The dollar isn't the only currency in the world, there are other currencies," he said. "What people are saying now is that they are discarding those other currencies… This is the universal currency."

"Gold is still a safe haven," James Turk, editor of the Free Gold Money Reporttold CNBC. "What people are fleeing is counterparty risk. Gold is a tangible asset. It's a very attractive asset to own in this period of uncertainty."

Turk noted that "there is a lot of paper trading, and people liquidate the paper because they're over-leveraged. But you can see, gold is back up today, which is I think an indication of its longer term stability and the fact that people do see it as a safe haven."

Ashok Shah, chief investment officer at London and Capital, said that the demand coming out of sovereign buyers, who are emerging as major players in the market as they look to reduce their direct dollar exposure, is outstripping supply, and could push the price significantly  higher.

"The really big driver for the gold ultimately is the current account surplus in the sovereign wealth funds, but the problem is the amount of demand that will come from all of these countries is so large compared to the existing total available supply," he said. "In essence, where does the clearing price ultimately equilibrate? I think that's very hard to say."

"What we have had in the last three months, and probably longer, has been a continued flight to safety, gold being one of the beneficiaries," he added.

"Are we going to enter another long run flight to safety? In other words, is there going to be an acceleration in the flight to safety? If that is the case, effectively the authorities will have to respond with some kind of quantitative easing."

At Castlestone Asset Management, CEO Angus Murray said that this ultimately could push prices north to $2,000 an ounce.

"The issues of Europe will not be solved for a number of years, nor will those of the United States. Gold will continue to be added to portfolios for this reason and the prices are likely to continue to appreciate towards $2,000 over the course of this year. One of the only assets that investors feel comfortable owning today is gold. That’s an amazing statement in itself," he told CNBC.com.

Davies agreed. "We've moved into new price territory in nominal terms. At this point, the buyers, which are primarily out of Asia and the sovereign wealth funds in particular…they are stepping up their buying as they see the issues in the world, but there is no willing seller so we are going to drive prices up," he said.

"Because we are in new territory I think we can move exponentially up to the $2,000 level."