THIS CURRENCY TRADE IS SCREAMING

"Wow." That's the word that describes the massive decline in the British pound since we said "look out below" last month.

On February 6, we showed you a chart of the impending breakdown in the value of Britain's paper currency, the pound. Britain's government is a world leader in excessive spending and excessive debt. Since "there ain't no such thing as a free lunch," it was only reasonable to expect the breakdown to lead to more pound weakness.

But even we didn't expect the clobbering you see in the chart below, which shows the past year's trading in FXB, a fund that tracks the British pound. FXB has lost 4.3% in the past month. While this doesn't sound like much, it's an enormous fall for a major currency... one millions of people must use to carry out basic transactions.

Currencies are the aircraft carriers of the financial world. Once they get a head of steam built up and begin trending, they take a long time to change course... so currency traders can continue to take a bearish bias here. Or you could take the excellent "sleep at night" currency advice from our colleague Porter Stansberry and simply trade paper pounds for gold and silver.

The Crowd Is About to Get Destroyed in Currency Trading

Several weeks ago, I was invited to a client meeting in Miami held by the wealth-management firm AllianceBernstein.

Bernstein's investment research has long been regarded as the best on Wall Street.

Why? Bernstein does honest, thorough work because it doesn't engage in investment banking. It's paid to be right, not to sell retail clients down the river to pull off a public stock offering or sell a bond.

In Miami, the firm's head economist spoke about the dynamics of the global currency markets and explained AllianceBernstein's trading strategy. It borrows in four to six currencies with low interest rates and buys four to six currencies with higher interest rates. This diversified approach reduces risk substantially. And it has historically produced better average returns than the S&P 500 with less volatility.

The presentation was designed to entice wealthy U.S. investors to open leveraged foreign-exchange trading accounts with AllianceBernstein. And I must say, the presentation was among the most sophisticated I've ever seen. The economist really knew his stuff. But... I was deeply troubled by the presentation.

In my experience, whatever the big brokers are pitching to retail clients, that's the thing most likely to blow up next. One year it's dot-com stocks, one year it's mortgage backed securities, one year it's commodity futures, and so on...

I'd never seen a Wall Street firm give a leveraged currency presentation to retail clients before. While this kind of trading can be very profitable, it is extremely risky – especially right now.

For the first time since just after World War I, we have serious sovereign debt problems in all of the major currencies. And for the first time in the history of man... we have a global monetary base that's not anchored to any real asset.

In fact, the largest reserve assets of the world's monetary system are the obligations of a bankrupt nation (the U.S.) that must print money to afford its own annual deficits (read my essay on this here).

This is a recipe for disaster.

I believe the entire system of paper money – globally – is coming unglued. The result will be a kind of volatility and disruption to the global economy the world hasn't seen since World War I, when the gold standard ended in 1914.

Ironically... ignorant of these enormous risks... retail investors are running full speed ahead into foreign-exchange trading.

Deutsche Bank reports its currency trading platform for retail clients saw a 40% increase in customers during 2009. In the U.S., foreign-exchange volume was up 28% last year – almost entirely because of retail trading.

I suspect these numbers will continue to grow for a while, but I urge you to avoid this looming disaster. It will be devastating to unsophisticated traders who don't practice sound position sizing and don't use stop losses.

While trading foreign currencies has been a good strategy for a long time... what will happen to those strategies as volatility soars and the large currencies collapse? No one knows.

But one thing I do know for sure: It won't end well for retail investors. Someone has to hold the bag for all of the world's paper money. Who do you think will end up holding the bag? Retail investors... or giant institutions like AllianceBernstein?

My advice for anyone itching for a currency trade: Trade worthless paper dollars for gold bullion. Trade them for silver. Repeat as often as possible.

NO SURPRISE FOR THE POUND, BILL GROSS IS RIGHT

The message from today's chart: Bill Gross 1, British politicians 0.

About three weeks ago, we profiled the downside "breakout" in the British pound. Investing legend Bill Gross said Britain's government bonds (and therefore, its currency) were "resting on a bed of nitroglycerin," made of debt and malinvestment. British politicians publicly disagreed with Gross and assured the public that the government's finances are going to be fine.

The chart below displays the past year's trading in the British pound. As you can see, the market is taking Gross' side on this one. The red arrow marks our first "look out below" warning. This is when the pound hit its lowest point in four months. The currency then staged a flimsy relief rally, which fizzled. And in the past week, the pound just struck another new low (blue arrow).

In a world of runaway government bailouts and handouts, expect this kind of weakness to hit almost all paper currencies. And while the best traders can profit in the currency markets, the "sleep well at night" action here is to take a position in the only honest money around – gold.

THE NEXT WORST CURRENCY

Our chart of the week displays an asset giving the euro some competition in the "wet paper sack" contest.

To recap, we've tagged the euro as the weakest and most vulnerable currency in the world right now. Our chart on Friday showed how the euro plummeted last week. But now, Britain's currency, the pound, is saying "Don't count me out, old chap... My homeland is also choking on tons of bad debt and malinvestment."

Just recently, super investor Bill Gross warned that British government bonds are "resting on a bed of nitroglycerin." He's avoiding Britain's bonds and its currency due to huge levels of government borrowing.

To the right, you can see the market agreeing with Bill. Just this week, the pound violated its October low. This is a loud confirmation of Bill's bearish analysis. Euro: Get ready for a little competition on the race to the lower right of the chart!

OUR CURRENCY TRADE IS OFF TO A GREAT START

For folks holding lots of euros in the bank, 2010 has become "the year of watching my savings disappear."

When looking for stocks, commodities, or currencies to bet against, market expert Dennis Gartman recommends targeting assets that exhibit weak price action compared to their peers. This is like "throwing rocks into a wet paper sack," according to Dennis.

Right now, mark the euro down as the "wet paper sack" of the currency complex. We identified the euro's "1-2-3 top" back on December 16th. Just after that piece, the euro plummeted to the $1.42 level. It then staged a brief relief rally before heading back down.

Lately, the euro has fallen nearly every day with no support whatsoever. Currency traders: Here's your wet paper sack. Currency holders: Here's another reason to keep a good portion of your savings in gold.