Managers of two top-performing gold funds expect gold to soar further. Here’s why, plus five stocks they expect to share the ride.

Gold’s much-heralded climb above $1,000 an ounce was pretty short-lived. Gold’s long-term ascent won’t be. With gold now trading closer to $900, this is a great time to load up on more exposure to bullion, which is only taking a breather before heading to $1,500 an ounce and higher. That’s the view of two gold gurus who have been correctly calling bullish advances in the yellow metal for years, most recently predicting the move to $1,000 an ounce. That was in November, when it seemed like an audacious forecast.With their forecast proved correct — if briefly — they’re not backing off. “There is lot more upside for gold,” says Thomas Winmill, who manages the Midas Fund (MIDSX), one of the top-performing precious metals funds, with a three-year average annual return of 41.6%. Winmill thinks gold could see $1,500 in 12 to 18 months.

Frank Holmes, who manages the second-best-performing gold fund this year, U.S. Global Investors Gold and Precious Metals Fund (USERX), sees bullion going to $1,500 to $2,000 an ounce in the next leg up. He’s not offering a time frame for that target.

How Gold Goes Higher

If they are right about the move up to $1,500, that should drive some of their favorite gold and silver stocks significantly higher over the next year or two. Here’s the short list: Goldcorp (GG, news, msgs), Kinross Gold (KGC, news, msgs), Freeport-McMoRan Copper & Gold (FCX, news, msgs), Pan American Silver (PAAS, news, msgs) and Silver Wheaton (SLW, news, msgs).

Another way to go, of course, is to simply buy shares of their funds.

Here’s a look at why they think gold will see $1,500 within a year or so.

Reason No. 1: The dollar’s value is declining. “Gold is attractive as a safe haven when the dollar is declining,” says Holmes. But why will the greenback continue to weaken? Above all, the Federal Reserve has been slashing interest rates dramatically, and it may reduce them even more. This makes investors move money to other countries — especially emerging-market economies that have higher interest rates and higher growth rates. As investors move away from U.S. assets, they sell the dollar and push it down. And they buy other currencies, pushing them up against the dollar.

Investors are also losing confidence in the U.S. economy and U.S.-based investments because of the growing federal deficit, the subprime mess and concerns about the Fed’s new role in bailing out investment banks exposed to too much subprime debt.

Reason No. 2: More inflation on the way. To see where inflation is headed, just take a peek upstream in the production process, says Winmill. Prices on intermediate goods — or stuff that is midway through production — advanced 8.8% during the 12 months through the end of February. Prices on early-stage “crude” goods were up 24%, according to producer price index data released by the Bureau of Labor Statistics (BLS). “I see those price increases coming into the economy,” says Winmill. “That is inflation in the pipeline.” Prices on finished goods gained 6.4% in the same time frame.

Consumers, of course, are already aware that prices for food and gasoline have gone up. But as inflation persists, they’ll hit a pivotal point in their thinking, when they switch to expecting prices to continue climbing. “That will trigger a psychology of investing in gold as a place to hang on in an inflationary environment,” believes Winmill.

Reason No. 3: Investors will seek greater safety. Inflation is already so high that investors are losing money in traditional “safe” investments like U.S. government bonds. Consumer prices are advancing by about 4% a year, according to the BLS, while two-year U.S. Treasury bonds are yielding around 1.6%. So investors who now buy two-year government bonds will be losing 2.4% of their money per year. If the Fed lowers rates even more and inflation advances, the negative returns on government bonds will only widen.

“Historically this has been very good for any kind of hard asset, and particularly gold,” says Winmill. “In a negative interest rate environment you don’t want to hold bonds because you lose purchasing power.” Winmill sees plenty of room for a shift in the flow of investing dollars toward gold, because only a minuscule amount of money in managed accounts is dedicated to investments in commodities.

Meanwhile, people continue to lose lots of money on investments like real estate and debt instruments backed by subprime mortgages — which will keep scaring them into buying perceived safe assets like gold. “There is massive deflation in real estate and financial assets, and gold has traditionally done well when there are concerns about deflation,” says Holmes.

Reason No. 4: Oil is getting pricier. Holmes points out that that over the past five years, gold and oil prices have moved in sync 90% of the time. The reason: When oil-producing countries take in more money because oil prices go up, they diversify by investing in gold. Typically, this creates a 10-to-1 relationship between the price of an ounce of gold and a barrel of oil. Thus $1,000 gold makes sense when a barrel of oil is $100. But that ratio can jump to 15 to 1 when geopolitical turmoil drives other investors to the safety of gold, says Holmes.

He thinks oil could trade as high as $125-$130 a barrel this year because of a basic imbalance between demand from emerging economies and short supply due to a lull in exploration investments during the 1990s, when oil prices were much lower. “If oil were to run to $125 a barrel because of a geopolitical event, gold would easily go to $1,500 an ounce,” says Holmes.

Reason No. 5: Gold should follow other commodities. Since so many other metals, including copper and oil, have smashed their inflation-adjusted price records, why shouldn’t gold follow, asks Holmes. If it does break through its inflation-adjusted high, set in 1980, it would trade north of $2,000 an ounce.

Here’s a closer look at the five precious metals plays that should benefit from a spike in the price of gold to $1,500 an ounce.

Goldcorp

Both Winmill and Holmes count the Vancouver, B.C.-based Goldcorp among their favorites. Winmill likes it because it is the fastest-growing low-cost producer among “senior” mining companies, or those that have producing mines.

The company expects 50% growth in gold production over next five years, driven by development of two promising Mexican projects called Peñasquito and Los Filos, and expansion of its Red Lake mine in Canada. Factoring in proceeds from the sale of mining byproducts like zinc and copper, the company should produce gold at $250 an ounce for the next five years, says Winmill.

Goldcorp is relatively safe because its holdings are in politically stable North American countries. It also has no insurance in the form of advance sales of gold meant to protect against a price decline. That’s good for investors if gold goes to $1,500 an ounce, because they will get the full benefit of the price increase.

Kinross Gold

Like Goldcorp, Kinross Gold is a low-cost producer about to see rapid growth, which is why it places high on Winmill’s list of favorite gold stocks. New projects in Brazil, Russia and Washington state should help increase production by 60% in 2009, compared to last year. Gold production costs (factoring in proceeds from the sale of silver, considered a byproduct of gold mining) should fall to $335 an ounce or less. One risk: The Kinross project in Russia could face interference or even a takeover by the Russian government.

“The operations in Russia come on line in the second quarter, and that is usually when the Russians make their move,” says Winmill.

Freeport-McMoRan Copper & Gold

The world’s largest producer of molybdenum and one of the largest producers of copper, Freeport-McMoRan also has an estimated 41 million ounces in gold and 231 million ounces of silver reserves. That makes it one of the bigger players in the precious metals space.

Freeport’s Grasberg mine in Indonesia has the largest single gold reserve in the world. Freeport-McMoRan’s stock still looks cheap, despite healthy gains in the last year. It trades for about 7.1 times expected 2009 earnings, compared with 15.4 times 2009 earnings for other large companies that produce both copper and gold, according to Citigroup (C, news, msgs) analyst John Hill, who has a buy rating and a $125 price target on the stock.

Two silver plays

Because silver will move up in price for the same reasons that bullion does, our two gold gurus put two silver producers at the top of the list of their favorite precious metals plays.

Winmill likes Pan American Silver, which he says looks cheap considering that the company expects production to increase by 14% to 19.5 million ounces this year. Bear Stearns (BSC, news, msgs) analyst Michael Dudas thinks production could advance to 25 million ounces by 2009 — one reason he has a $40 price target on the stock.

Holmes likes Silver Wheaton, which makes money by purchasing silver from miners in long-term contracts and then reselling it. The company has contracts to purchase silver for about $3.90 an ounce, according to Morningstar analyst Vahid Fathi. That looks pretty good given that a move in gold to $1,500 suggests silver would sell for $30 an ounce.