STEPHEN LEEB
PRESIDENT
LEEB CAPITAL MANAGEMENT

COMPANY: Newmont Mining
TICKER: NEM (NYSE)
PRICE: $50.83 (as of 4 p.m. yesterday)
52-WEEK RANGE: $34.90-$62.72
MARKET CAPITALIZATION: $22.71 billion

Stephen Leeb is the president of Leeb Capital Management in Manhattan and has more than 25 years of investment experience. Denver-based Newmont Mining is a gold exploration and production company with operations worldwide. Mr. Leeb spoke to David Dalley of The New York Sun and explained why he believes the gold price, and gold stocks such as Newmont, are set to soar.

Why do you like Newmont?

Because I like gold, and Newmont deals almost exclusively in the raw commodity.Their fortunes rise and fall with the price of gold.

And why do you like gold?

Historically, the ratio between gold and oil has been around 18 to 1. For every dollar of oil, the price of gold has been about 18 times greater. Today the ratio is around 9 to 1. Though gold has been strong over the last couple of years, it has dramatically lagged the price of oil [in terms of the ratio]. You have to ask the question – what’s going to make the ratio rise again?

Go back to mid- to late ’70s, again a time when the ratio was around where it is today, and then rose dramatically. What changed? In mid-1976, inflation, though high, had been coming down despite relatively high oil prices. After mid-1976 inflation started to rise – a combination of still rising oil prices and a few other factors. And in that context the ratio of gold to oil started to rise dramatically. What’s my point? It’s that when oil starts becoming inflationary, the ratio of gold to oil starts to increase.

Is that the case now?

Right now, oil is at about $60 per barrel, and I believe that it has just started to become an inflationary event. Oil has risen about sixfold since about 1999, but it still hasn’t had a big inflationary effect. In my opinion, we’re close to a point of inflection.The headline CPI numbers are coming in at around 4%, and it’s clear that oil has begun to have some meaningful effect on inflation.

If, as I expect, oil rises from $60 to $100, that impact will become ever more severe. And that means that the ratio of gold to oil should begin to rise fairly dramatically. If you believe oil can go from $60 to $90 or $100 – which is no longer a heroic call (and I believe it can go to $200 within six or seven years) – you have to also believe that it will have a reasonably big impact on inflation (it certainly won’t be neutral), and that will cause the ratio to change.

What does that mean in terms of the actual price of gold?

The gold price could go from the mid-$500s to as high as $2,000, just to get back to historical norms, if you believe that oil can get to $100. In terms of Newmont, that translates into a threefold increase in earnings. That’s pretty huge.

Why should the ratio hold?

There’s nothing magic about it. Gold has been somewhat constant over time. It’s been an inflation hedge. Why is the ratio and the price so low today? Because inflation is low. Why does it hold at 18 to 1? No real reason. It’s just the way people have viewed oil relative to gold historically.

What are the risks to the forecast?

That somehow we find our way back to a 1990s environment – where inflation is very benign, problems with the deficit and the dollar go away – then oil might go back and the ratio might stay at 9. But think about it this way: The downside for gold under that scenario is somewhere around $350. The upside, as I’ve suggested, is very legitimately somewhere close to $2,000. With that range, and with the commodity currently trading at around $570, I’d say you buy it.