(FORTUNE Magazine) – Oh, the mysteries of gold. It is interest-rate sensitive, like bonds, and an inflation hedge, like real estate. It is also a commodity, and a currency, and it makes a swell watch. So how can you tell what the darn stuff will do next? That's a timely question given last quarter's run-up from $361 to more than $400 an ounce. Gold prices had been drifting downward from $484 in January 1988 to the $360 range last September. Then, falling interest rates, the minicrash of October 13, and an unexpected wave of democratic activity in Eastern Europe sent gold to a high of $418 in mid-December, though it has since backed off. Stocks of companies that mine gold did even better: Shares in the major ones rose 40% from their lows in 1989. Mutual funds that invest in bullion and gold stocks had an average total return of 23%. Is gold's gleam merely a response to the nightly news? Or could this be the beginning of a new gold rush? Steven Leuthold of the Leuthold Group, an institutional investment adviser affiliated with Weeden & Co. in New York City, sees the onset of a bull market. He thinks that worries over the weak dollar are driving gold's price: ''America's inability to stabilize its debt is a growing concern to foreign investors.'' Says Douglas Groh, portfolio manager of IDS Precious Metals Fund: ''The gold bear market appears to have concluded its cycle. The recent run-up was dramatic, and prices will take a breather before they move higher.'' He foresees a trading range of $395 to $450 this year, based on fundamentals alone. What fundamentals, you ask? First, after years of production increases, supply is slowing. It could get even tighter if the Soviet Union moves toward a gold-backed ruble. In that case, the country, which is believed to be the world's second-largest gold producer after South Africa, would pull large amounts of gold out of circulation and use it to back the bonds that will harden the currency. * Second, demand is increasing. While industrial requirements for dentistry, electronics, and coins are relatively steady from year to year, manufacturing demand for jewelry has risen threefold over the past decade and was up 8% worldwide in 1989. The Japanese in particular are gaga over gold. Demand for gold jewelry was up 23% last year; this year looks like a big one for gold as an investment. Two months ago the Japanese government ruled that property and casualty insurers could hold up to 3% of their assets in gold, and it is possible that life insurers will be allowed to do the same. ''This legitimizes gold for individual investors in Japan,'' says Leuthold. ''If gold becomes part of the Japanese savings program, that could be quite positive.'' Eastern Europeans are also gold-minded. Says Michael Brown of the Gold Institute, a trade group in Washington, D.C.: ''If you had a choice between owning zlotys or gold, which would you choose?'' U.S. investors who missed the metal's rally, and who can stomach steep multiples, can still try some stocks. Says Martin Wiskemann, portfolio manager of the Franklin Gold Fund: ''When the price of gold is going up, there's enormous leverage in equities.'' The safest gold play is to buy a basket of the major producers. Those with clean balance sheets, good reserves, and steady growth rates include Newmont Gold, Echo Bay Mines, and Placer Dome. Alas, the average P/E is 40, so you really need faith that gold prices will go up. Says Vahid Fathi, an analyst with Prescott Ball & Turben in Cleveland: ''If you look at P/E alone, these stocks are not cheap. But you buy gold shares as a proxy for the metal. If you see bullion rising, then profits will rise, and the multiples will look better.'' Fortunately, a few gold stocks are selling at lower premiums. These include Pegasus, with mines primarily in Montana. Heavy snows last winter depressed profits, and the stock is trading for only 11 to 12 times expected earnings in 1990. Two others selling well below the group are Corona, a Canadian company with operations worldwide, selling at 16 times projected earnings, and FMC Gold, with a P/E of 14. ASA, a closed-end mutual fund, is priced at a 25% discount to the net asset value of the shares it owns. The fund holds high- quality South African stocks, which have been depressed because of the country's shaky political situation.

CHART: NOT AVAILABLE CREDIT: SOURCE: COMMODITY EXCHANGE CAPTION: GAUGING GOLD Though still less than half its 1980 high, gold seems to be bouncing back. Is this the beginning of a golden bull market? Analysts like the fact that supply is down and demand is up, but say the price will probably stagnate awhile before moving higher. At right: gold refining at Eco Bay's McCoy/Cove mine in Nevada.