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Bear Stearns analyst Michael Dudas spoke to Wall Street Week about the outlook for commodities and gold. Here's what he had to say on the key issues.

On the climate for commodity investing:

I think the investment climate for things is actually quite good. We've had a period throughout the '90s of a very deflationary environment, where the climate wasn't so good for commodities like oil, copper, gold, coffee, silver, coal. I think starting about two years ago we are in an early stage of a long-term commodity market where we're going to see very bullish pricing going forward.

On what's driving demand for gold:

You've got a couple of interesting drivers. First is global demand. We are now starting to see more synchronization and demand for commodities in general driven by growth in Asia, and we've had a very strong economy in the United States. Secondly, the world grossly overcapitalized the technology and telecommunications industries throughout the 1990s and didn't put capital elsewhere. That led to very tight markets in many commodities, and we're seeing that in oil right now where oil prices have quadrupled off the bottoms in 1999. And we've not had the investment in many of these commodities. Investments work with a lag. When you start to think about investing in a commodity to get it out of the ground, the lag time is anywhere from two to five years in certain commodities. So I think we're going to see a period of tightness throughout the next few years as we start to see more investment in the commodity space.

On Asia's impact on commodity prices:

Asia--China in particular and India even--is starting to be a very important aspect towards the growth rates in demand for commodities. It's interesting to point out that China has been the most important growth market for commodities like iron ore, coal, steel, aluminum, copper and other Asian economies as well. That's part of the mix, but the rest of the world does help out as well. A better U.S. economy, which is still the engine that drives the world, can't hurt. And if the European economy starts to pick up steam, we could have a very strong demand pull in commodity markets on the top of that growth in China and India.

On commodity demand amid inflation pressure:

I think what you would see is continued global demand, global economic growth. At the same time, I think you need to see relative mild to even better than mild inflationary aspects throughout the world. Typically, commodities--real assets--do well in a reflation or inflationary environment. So I think some inflation in addition with global economic growth and relative supply checks would be a very good environment for commodity prices over the next few years.

On ways to invest in commodities:

I think when investors are looking at trying to benefit from the improvement or the expected improvement in gold prices, there are a couple of ways to look at it. One would be a mutual fund that invests primarily in gold producing equities. That's a very diversified way to take out country risk and specific country risk but also benefit from improvements in gold prices. Another would be to invest directly in the equities themselves. The major producers are based out of North America. There's a couple in Latin America and some in South Africa. But the world has consolidated. For some of the more risk-tolerant investors, there's always the more exploration, speculative type of companies that are drilling deposits around the world looking for that mother load, and if you get the right one, you could do quite well. But again, that's much more on the higher risk tolerant category for investors. The more aggressive investor can also look towards the commodity markets and play the futures, but that's very volatile and it's very high risk, so I think investors need to be careful when they go that route.

On what could trip up commodities:

I think deflation. If the world's central bankers take liquidity out of the marketplace and we have a more deflationary environment--caused by the extremely high debt levels we've seen throughout the world--that could be difficult for commodities. Historically a deflationary environment is not a very good time in general for absolute price movements in commodities. I think the second thing would be if the world would go into a recession. That would cause demand for commodities to fall and that wouldn't be a good thing.

On future gold prices:

I think some people have been surprised that maybe gold prices haven't moved higher in that anxiety-ridden geopolitical world that we're in right now. Currently we're hovering near the $395-$400 level. I think the anxiety factor is one issue. Another issue is the liquidity that's been added to the system by the world central banks over the past few years, primarily by the U.S. central bank. That's caused the value of the U.S. dollar to trade below 10-year averages, and typically as the dollar weakens it's very supportive for dollar-priced commodities. Gold is the ultimate dollar-priced commodity in the world.

On gold's relationship to the U.S. dollar:

Through the 1980s and 1990s, the world has looked upon the dollar as the reserve currency, as the currency of last resort. I think some investors have been a bit concerned by the policies of the U.S. government, and it's showed up in the lower value of the U.S. dollar. And typically there's an inverse correlation between the lower value of the dollar and a higher gold price. Gold is still looked upon as money by many people in the world, especially in developing economies like India and in China, but there's a lot of things that are involved. Most market's sentiment based. That drives up the price of gold.

On gold's role in the market:

People typically have looked towards gold as a place for a safe haven, because technically gold is nobody's liability and you can't really create much more gold to the marketplace than what we're creating from the mines throughout the world. There's probably 150,000 metric tons of gold that are above ground in the world, whether they're in central bank vaults or they're around your neck or around your finger as jewelry. But you only add about 2,000 to 2,500 metric tons of gold per year from the mines throughout the world. So you won't see a huge new supply of gold to the marketplace. I think people get a bit of a comfort when there's some uncertainty in the world.

On the psychology behind gold's success:

I think it's one part the anxiety. The world is not the same since 9/11. We'll never be the same again, and all things that were looked upon more favorably back before 9/11 now are maybe a little bit less certain. And I think gold has reacted quite favorable towards the value of the dollar declining, the fact that the world's economies are growing and demand for commodities in general are improving. There's also a very high correlation over periods of time with high energy prices and high gold prices, as again inflation leads towards real assets improving. So I think it's a part of the anxiety that's caused gold prices to move higher, but it's not the overriding reason.

On whether inflation would be beneficial:

I think the world does need some reflation. We got through a very difficult time in the late '90s and 2001. You mentioned about the political issues we've mentioned and 9/11, and we had a recession in the U.S. The world was in a deflationary spiral, and the world central banks recognized that and added a lot of liquidity to the system. I think a little bit of pricing would be helpful to the world, especially for developing countries that have a lot of natural resources that the world would need. They could use that money just to help reinvest and better lives for themselves. So I think a little bit of inflation, a little bit of commodity price improvements could be quite helpful, but then we could cross the line. And if oil prices or energy prices were to double from these levels and commodity prices were to expand dramatically, that could choke off any recovery and cause some economic activity disappointments going forward. But I think in the overall scheme of things, it's not such a bad thing to have a little bit of reflation.

On gold mining:

You can't find gold unless you have rights to the land to go look for it. And you could be a really good mining company and have a really good mine and generate a lot of earnings and cash flow, but to find more and get growth you need to have access to land. A mine is a depleting asset. Typically gold mine lives are anywhere from 7 to 15 years and once you get through that 15 years there's no gold left. So to continue to generate growth and returns to investors, you need to look for the stuff.

On gold mining companies:

I think Newmont Mining manages their assets, their balance sheet, and their people better than most other metal mining companies. They have a very strong focus on returns. They will not make investments unless they get good returns for their shareholders. That should provide growth. They also have the ability to manage a large amount of geologists and mining engineers, where I think in the next five to 10 years could be in short supply. The bigger a company that you are, the more opportunities you can offer your employees to explore for gold, produce it and generate very good living incomes for them. I think that is going to be a very helpful skill set over the next few years.

There are some pretty big mining companies out there. For example, Rio Tinto and BHP Billiton are two probably the most noted, large mining companies, but they are diversified miners. They produce all types of commodities, from aluminum to copper to coal to iron ore to steel to oil and gas. I think from a precious metals or a gold only standpoint, Newmont has the largest market cap. I think it will matter going forward.

On future gold prices:

I think we'll make higher lows and higher highs in gold prices. Our average price forecast this year is $415 an ounce, and we're probably $10.00 lower than that going into June, early June. I think over the next 12 to 18 months, we could see gold exceed $450 an ounce, and I think we'll hold the $370 level which we witnessed earlier in May. I think we'll make higher lows and higher highs in gold over the next 18 months. And as long as we have an accommodative global monetary policy and improved economic growth worldwide, I think commodity prices in general will move higher and gold in particular.

On which gold vehicles will perform best:

Very difficult to say whether the commodity class given equities, bonds, that's a little bit out of my bailiwick, but in a diversified portfolio, given the favorable supply and demand characteristics in most commodities these days, it probably makes sense to have investors take a look at the commodities space. And if they have the ability to tolerate a little bit of volatility, because they are typically very volatile prices, I think you can make some above average returns.