by Archie M. Richards, Jr., CFP^®
December 6, 2004

The headlines have a new worry: the value of the dollar.

Forget about the dollar. Changes in its value do not signal that stock prices will subsequently move in the same direction. When people expect the dollar to fall, stock prices won't necessarily fall as well.

Back in 1978, President Carter's unwise economic policies threw the dollar into a tailspin. Its weakness was front-page news. One day that summer, it was reported that European vendors were refusing to accept dollars from American tourists. The vendors were tired of the dollar's value deteriorating between the times the tourists paid the vendors and the times the vendors were able to exchange the dollars for local currencies.

But the day this news came across the wires was also the bottom day of the dollar's decline. Its value then began to rise. Beginning at about the same time, the stock market started going up as well, big time. The news was the signal to buy stocks, not sell.

Elected in 1980, Ronald Reagan greatly improved U.S. economic policies, causing the value of the dollar to soar. By 1985, the dollar's strength was front-page news. A Barron's cover story at the time predicted that the dollar would continue rising.

A reporter of a local paper for which I was then writing columns called me to ask, "What stocks should people buy in anticipation of the dollar going up?"

I said, "Listen, the dollar has been going up for 8 years. By the time a price trend is so strong that even reporters expect it to continue, the trend is likely to reverse." (This was a nasty way to respond to the poor fellow; the conversation didn't last long.)

I then wrote a column recounting the conversation and predicting that the dollar would begin to decline. Only one week after the column was published, the dollar began a long-term drop. (At the peak, a dollar bought 272 Japanese yen.)

Beginning at the same time, the stock market went up, big time.

Ten years later, in 1995, the dollar was extremely weak. A dollar then bought only 88 yen. The weakness was front-page news. A Barron's cover story predicted that the dollar would continue falling.

On a TV business show at the time, the anchor interviewed an expert on the value of the dollar. Every time the expert implied that the dollar would continue falling, the anchor let the statement stand. But every time the expert implied that dollar would begin to rise, the anchor challenged him. It was obvious that the anchor expected the dollar to continue going down.

Except for the dollar being weak instead of strong, the conditions were exactly the same as they'd been 10 years earlier. The dollar's value was front-page news, and the media was convinced that the long-term trend would continue.

I therefore bought a speculative investment that profited only if the dollar rose substantially. (I bought and sold far more often then than I do now, usually to my detriment.)

The dollar price fell more at first, but it then began a rapid rise. In about 6 months, the dollar went up from my entry price of 88 yen to 124 yen-to-the-dollar. I sold and made 5.5 times my money. It was by far the most profitable investment I ever made.

Oh yes, and at the same time, the stock market rose big.

That's the key. The stock market rose big on all three occasions: twice, when the headlines were concerned about the dollar's weakness and once when the concern was its strength.

The dollar is weak now, this time in relation to the euro. Take no notice. Time and time again, concerns people have about a price trend prove to be misplaced. Buy and hold the stocks of the world. They're going up, big time.

In the last four years, the price of gold has risen from $254 to $458 an ounce. Traders at New York's Comex Exchange say that the speculative gold rush on the exchange floor has been similar to the stampede into crude oil at the peak last October.

If you buy gold investments now, you're asking for trouble.