Bullion on the Bubble; Blodget on the Skids

Gold, the ultimate pre-postmodern investment, had a big 2002, with its best annual percentage gain since 1979; the dollar, conversely,suffered its steepest plunge since 1987. Is this noise-or a trend?

The mainstream financial media is suggesting that the rising price of gold is nothing more than passing jitters. “Bets on Gold-Related Issues Reflect Events,” The Wall Street Journal announced last month. “Gold Highest for Nearly Six Years on War Fears,” splashed across the CNBC screen just last Monday. The New York Times blamed gold’s rise on inflation fears, “a weakening dollar” and the looming war.

Prominent newsletters, meanwhile, say: Forget Iraq and North Korea-think bigger, and think historically. Richard Russell of the Dow Theory Letters kicked off the new year by announcing that “my choice for the sector to be in during 2003 is gold …. I believe that gold is in the early stages of a major or primary bull market.” The refreshingly pessimistic Greed and Fear “remains firmly of the view that gold is at the very beginning of a multi-year bull market that will take the yellow metal many times higher than its present level. This is because gold is the only real hedge against the massive financial excesses that still prevail in the Western world.”

Should phrasing so portentous make one quiver, or chuckle? The cranks, after all, are notorious “gold bugs”; they look on “fiat currency”-paper money made legal by law or fiat, but not backed by gold or silver-as a kind of fraud. During flush times, belief in gold seems hopelessly superstitious: Gold is beloved only by those who distrust the blizzard of financial activity that surrounds them in a boom, built as it is on easy credit. To them, gold remains the one “true” money. During the 20-year run-up in paper assets, the price of gold has plunged-from $850 a troy ounce in the early 80’s to well below $300 in the late 90’s-and the investing public has forgotten that faith in gold has a sound pedigree. John Adams declared, “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and is therefore a cheat upon somebody.”

Morerecently,JamesGrant summed up the respectable, if quasi-apocalyptic, case for gold. In a November issue of Grant’s Interest Rate Observer , he wrote: “We on the fringe emphasize the impermanence of monetary systems …. The instability and contradictions of this system are what lead us to favor gold, paper money’s antithesis.” A gold standard enforces monetary discipline: It dampens inflation by imposing a brake on the minting powers of government, as every dollar printed represents a claim on a finite reserve of gold. If the dollars we spend on Hondas and brie can eventually be redeemed by the Japanese and the French for bullion, we must curb our national habit of consuming more than we produce. Since Nixon abandoned gold convertibility in 1971, the pessimists argue, easy money has financed a dizzy run-up in stock prices, an unsustainable housing boom and, perhaps most ominously, a yawning trade account deficit-the now-alarming discrepancy between what we import and export.

Fed Chairman Alan Greenspan years ago pronounced the dollar sound, and as long as “there is confidence in the integrity of government, monetary authorities-the central bank and the finance ministry-can issue unlimited claims denominated in their own currencies.” But the true poet of paper money, and the confidence it’s built upon, is Jason Goodwin, author of the best-seller Greenback , whose panegyric to scrip appeared in The Journal on Dec. 27. “Cold, old and remote, [and] it doesn’t even pay interest,” began Mr. Goodwin, looking down his nose at gold. Paper money does what gold never could: It establishes “a nation’s right to life, liberty and the pursuit of happiness, the right to determine its own future. Currency is about self-control-the social contract in motion, the point where trust and promises elide, testament to our ability to live among ourselves and to frame our goals.” Gold, meanwhile, “is a magnet for our wartime fears, it is only a brief outburst of irrationality in an irrational world, an atavistic sentiment, fleetingly indulged.”

Who’s Next?

What’s the opposite of gold, if not the Internet analyst? Gold represents, to its fans, the fixity of value in an uncertain world. Henry Blodget’s name has become synonymous, at best, with hope in a chimerical future; at worst, with institutionalized double-dealing. Saturday’s Times brought with it news that the Wunderkind turned scapegrace-whose telegenic bullishness on Internet stocks made him one of the most highly compensated Wall Street analysts of the 1990’s-will most likely be sued for fraud in the coming weeks. Regulators are apparently looking into the discrepancy between Mr. Blodget’s public support of start-ups underwritten by Merrill Lynch, and his private disparagement of them over firm e-mail. They’re also preparing to argue, according to The Times , that “Mr. Blodget’s research reports were inappropriately influenced by Merrill Lynch’s investment bankers.”

The piece, co-written by the redoubtable Gretchen Morgenson, is notable for the language used to describe Mr. Blodget’s claim to fame-his $400 price target for the then money-hemorrhaging online retailer, Amazon.com. “Mr. Blodget was perhaps best known for his December 1998 prediction that shares of Amazon.com … would reach $400 a share.” The piece gently buzzes with classic Times deadpan, hinting at the ungoldlike, postmodern nature of the $400 call: Mr. Blodget’s report was important for its prediction of a stock price, not an analysis of the actual worth of a company. By promptly rising to $400, Amazon in turn measured the power of Mr. Blodget’s voice, the depth of investor credulity and the velocity of naïve money-not the intrinsic value of its business. “The stock surpassed [$400] less than three weeks later, largely because of Mr. Blodget’s prediction.” The item contained one small fudge, though: The Times pegged the current trading price at $20.52, but neglected to adjust for splits. This gives the false impression that Mr. Blodget was wrong by a factor of 20; he was merely off by a factor of 3.3.