But a word of warning to investors. About 99% of the human race is unshakeably convinced that the value of real estate property must rise over time as surely as the sun will rise tomorrow; and that any pause in this remorseless trend will be momentary. You find the same universal conviction among followers of equities. It’s taken for granted that bear markets and crashes are just buying opportunities which pose no threat to the inexorable rise and rise of stock prices. And there’s a whole industry out there devoted to persuading people that capital growth and equities are synonymous, and stocks are the only serious way to beat inflation, and all well-informed people know this, naturally. The post-war history of stock markets and property markets has encouraged these mindsets* – though if you take off a couple of minutes or three to think about it, you will agree that the more things have done this in the past therefore the more people are convinced they will continue to do so for ever –the less they are likely to do so in future… because prices have been driven up in exact proportion to the conditioned expectations of those who think in this way. The people who thought that way about precious metals have had second thoughts. Gold and silver have long been the basis of money. In the old days when the two were interchangeable, the basic difference was that money earned interest and was susceptible to devaluation through inflation. This hasn’t changed, following the terminal separation of currency and gold in 1971. Over very long time-spans, the price of precious metals can be expected to follow trends in general inflation and mining costs. But mean– while, if you think about it, the relationship of gold to money has to reflect changes in the “real” interest rates, adjusted for inflation.

When real interest rates went negative, as they did in the 1970s, gold became relatively attractive, and the price soared against all currencies. At the start of the 1980s, real interest rates on the dollar went positive (very), and the price of gold collapsed –and not just in dollar terms. This may seem obvious, but it doesn’t seem to have got through to followers of gold. It’s not an academic point. So long as high real interest rates endure, and are expected to endure, the price of gold will wallow; and the total return on currency will exceed that on gold by at least the real interest rate. In these circumstances, which prevail foreseeably, gold has no interest as an investment.

Money does, because it offers a real interest return. How much return depends on the currency. And as with gold, shifts in real interest rates on individual currencies tend to be reflected in currency rates, producing enormous fluctuations as we all know –meaning enormous profits and enormous losses.

As a matter of fact, the recent history of currency markets has encouraged the view that the currencies – that means the dollar – move in huge trends, so that all you have to do is to catch onto some such trend and go with it for a couple of years until it’s obviously time to change and ride the trend in the reverse direction. Such an approach is doomed to extinction for precisely the same reasons as the equity cult is doomed to extinction: that as soon as everyone thinks this way, the trends will end in self-destruction.

No, let’s face it. The currency markets are not for those who love fantasy and self-delusion. They are, in fact, the quintessence of the ‘zero-sum* game’. In stock markets, when prices rise and fall, the wealth of all the participants taken together rises and falls too. Individuals can try and manoeuvre in and out, but the equity investment fraternity as a whole is subject to the whim of overall price trends. Fluctuations in the currency markets by contrast have no effect on the wealth of participants taken as a whole. A “fall” in the dollar is just another way of talking about a rise in the DM, Yen, pound etc. The overall wealth cannot be changed. We’re on our own.

The good news is that this means we are entirely in charge of our own destiny. For those who believe that trouble may lie ahead in the equity markets, the news is even better. Currency players are crash-proof. There is no such thing as a crash which wipes out wealth in the currency markets. No Meltdown Mondays. No Panic Fridays. Do the many fat years we have seen in stock markets mean seven lean years ahead? Who knows? But then again, who cares? Not currency traders.

Of course we care about being on the right side of the big movements in the dollar. The next chapter takes a look at the history of the currency markets and at the reasons for thinking they are “inefficient” and can be forecast. The subsequent four chapters consider how the currencies can be forecast –and how they can’t, for there are hosts of myths about currency forecasting. And the rest of the book, chapters 7 to 11, is concerned with turning forecasts into practical trading for profit. But first we must consider two ‘mind-traps’.

The fact that currencies are money –the money of different countries – causes a problem with most newcomers to currency markets. A UK resident, for example, will say: “I thought I should protect myself against a fall in the pound, so I switched a Ј100,000 deposit into D-Marks. Should I be holding Yen?” The truth is that if you area UK resident with all your expenditure and liabilities in sterling, there is no reason why you should hold any other currency. Or rather the only reason why you should switch sterling into another currency – say D-Marks – is that you think the best probability in the financial universe is that the D-Mark will rise against the pound.

There are two points here. The first is that you cannot decrease your risk by selling your own currency and buying another one (unless you have a liability in that currency): that increases your risk. The second is that the markets offer a number of bets, but it’s relatively rare that the best of them

is that X currency will rise against the pound –or any other specific nondollar currency. The way it is in real life is that the dollar is the currency against which all others are quoted; and there is a firmament of currencies that bounce around the dollar in their own ways. That’s why this book is called “The Way of the Dollar”. .Thus the relationship between the nondollar currencies is a residual of the basic dollar relationship. And the residual is not easy to analyse or forecast.

A professor of agriculture was questioned at a seminar: “Sir, I have 200 acres in East Anglia; what do you advise me to do?”. “Sow it down to barley and find a job” came the blunt reply. We are all obsessed by our own situation and think the world must have answers to it. But the answers are often nothing to do with our specific situations. Financial markets, in particular, know nothing about our own situations – and don’t care.

Looking at the currency universe from the point of view of your own currency (unless it’s the dollar) is a mind-trap. It happens because people think of their own currency as money and other currencies as something else: as an investment, for example, or as something they need for a specific purpose– to buy foreign goods, say. You may hear a UK investor say that he is selling all his shares and putting his money in D-Marks. It would not occur to him that he wasbuying sterling with the shares he sold: that doesn’t make sense. In the same way, it does not occur to him that he is selling sterling to buy D-Marks. If it did, he might also ask himself whether sterling was the best currency to sell in order to buy D-Marks.

In other words, people who are not too familiar with currency markets are not always aware that a currency transaction is unlike any other kind of transaction: it involves a sale and a purchase by the same person: you can’t buy a currency without selling another. But if that person only gives thought to the currency being bought, and assumes that the only currency they can sell is their own, what chance have they of getting it right against full-timers in a market which turns over $600bn a day. They have one hand tied behind their back in a battle with sharks. .