"Ici est tombe...." On Choosing to Fight


Gold At $2,500?
By Susan Kitchens

Leigh Goehring manages over $400 million worth of
metals, energy, and paper stocks for Prudential
Investments in Newark, New Jersey, and manages them
well. Over the past five years, his Prudential Natural
Resources fund has returned an annualized 10.9 percent
-- modest compared with the S&P 500's 24.2 percent, but
impressive considering the depressed state of most
hard-asset prices during that time. Last year Goehring
outpaced the S&P by 24 percentage points. So far this
year he's ahead by 15 points.

What excites Goehring these days? That most
unfashionable of metals: gold. "I am a raging bull when
it comes to gold," he declares. "In times of inflation,
people always end up just gravitating to it."

But hasn't the information revolution led to vast
productivity increases that have, in turn, consigned
inflation to yesterday's fears?

Goehring doesn't see it that way. Despite the fact that
he is dealing in what he calls "an out-of-fashion
industry," he thinks raw materials still make the world
go around, and that the fall of the Soviet Union left
the world awash in cheap commodities.

Now, however, Russia is beginning to develop again. It
will consume much of the commodities it has dumped on
the world market -- and this at a time when demand from
Japan and other commodities-hungry Asian countries is
on the rise again.

Goehring: "The period where the U.S. economy could
expand without fear of inflation is quickly coming to
an end." He recommends that every investor hold as much
as 20 percent of his or her overall portfolio in
commodity-related stocks.

In making the case for gold, Goehring points to the
relationship between the price of an ounce of gold and
the level of the Dow Jones Industrial average. Over
most of this century, the Dow traded at eight times the
price of gold. As recently as 1980, when gold spurted
to $800 an ounce, the Dow and gold were at parity.

But today the Dow/gold multiple is 44, an all-time
high. "This ratio has stretched too far," Goehring
insists. "At some point it has to snap back and even

In theory, Goehring says, the price of gold could go as
high as $2,500 an ounce. "If all of the dollars in
circulation (currently $560 billion) were backed with
gold, the implied price would be about $2,500."
Goehring concedes that central bank-selling of gold
makes $2,500 an ounce unrealistic anytime soon. But
equally unlikely, in his view, is a Dow/gold ratio that
remains seriously askew. "In the next ten years,
something will cause gold to rebound sharply. We can't
be sure exactly what, but something will happen."

The best way to play gold, Goehring says, is with
shares of mining companies. His favorites are Newmont
Mining, in the U.S., and South Africa's Harmony Gold
Mining. He likes Newmont for its promising new
Yanacocha mine in Peru. Harmony, he notes, has been
successful at buying marginal mines, cutting costs and
increasing the productivity of its work force.

Goehring is high on aluminum, too. In 1989 the former
Soviet Union satisfied a mere 1 percent of the Western
world's aluminum consumption. With the FSU's collapse,
that ratio jumped to 11 percent, and prices collapsed
from $3,260 per metric ton in 1988 to just over $1,000
per metric ton by 1993.

Today aluminum fetches $1,580 a metric ton. Goehring
predicts it will shoot to $4,400 a metric ton in the
next five years, as Russia's internal demand grows.
"Once Japan starts to grow again, there's going to be
another big, one-time increase in demand, just as the
supply starts to shrink."

Goehring's pick for aluminum companies? Texas-based
Kaiser Aluminum Corp. Platinum? Palladium? Goehring
likes them. The automobile industry, which needs both
platinum and palladium for catalytic converters, has
been consuming 9.5 million ounces a year. Platinum's
price is already at an 11-year high of around $580, and
Goehring expects the price to continue to go up. With
Russian inventories shrinking, Goehring predicts a
global shortage of the metal. "Palladium has some of
the best supply-and-demand fundamentals out there. The
price is going to skyrocket." Stillwater Mining, based
in Columbus, Montana, is Goehring's top choice for
exposure to platinum and palladium.

The price of oil, already up 246 percent in the past
year, is headed higher, Goehring forecasts, as demand
from China, India and other big emerging markets climb,
and proven reserve estimates have been grossly
overstated. Approximately 40 percent of Goehring's fund
is invested in oil-related companies, with most of that
in oil service companies. He especially likes Aberdeen-
based Stolt Offshore, a contractor to the offshore oil
and gas industry, and Bouygues Offshore, a subsidiary
of France's Bouygues Group that's listed on the New
York Stock Exchange.

Say this for Leigh Goehring, he practices what he
preaches. "My money is where my mouth is: 100 percent
of my personal portfolio is in commodity-related
investments," he says, pulling out a recent bill for
the storage of his personal gold and silver bullion