Gold likely to match oil's rally as equities slump on high inflation

New York: The spectre of inflation and a bear market in equities is a powerful formula to rekindle investor interest in gold, which looks to be staging a catch-up rally after lagging other commodities in 2008.

Bullion, which has often moved in lock-step with oil because of the metal's appeal as a hedge against inflation, has in the last several months parted ways with the energy and grain markets, which have soared to record highs.

Yet, in the wake of US Federal Reserve's decision last week not to raise interest rates but its warning that inflation is a growing threat, a sudden resurgence in gold appears to have revived its positive correlation with oil.

That should mean gold benefits as resurging inflation continues to wreak havoc for the stock markets, erode the value of the dollar and drive equity investors to seek returns elsewhere.

"The recent rise in the gold market shows that uncertainty and fears still exist out there, and the inflation concern due to the lack of a definite Fed statement was a big plus for the metal," said Bill O'Neill, managing partner of commodity firm Logic Advisors.

On Thursday, US gold futures soared nearly four per cent, posting the biggest one-day gains in dollar terms since 1985, as financial market worries and record oil sent global stocks tumbling.

Even though gold has lost 10 per cent after it hit a record high of $1,030.80 on March 17, bullion is still up 10 per cent year to date, compared with a 12 per cent decline of the broad-based global equities MSCI ACWI index.

On Friday, the US blue-chip Dow Jones industrial average was at one point more than 20 per cent below its October 2007 peak, on the brink of Wall Street's definition of a bear market, while US futures for August delivery ended nearly two per cent higher at $931.30.

O'Neill, whose firm has halved its gold investment since March, said bullion's bottom at $845 on May 2 should be the lowest level of this year.

Gold should soon rise in tandem with oil after their positive link was temporarily broken by a dollar rally in the past several months, market watchers said.

Gold is also seen as an alternative currency to the greenback.

The recent rise of gold - a traditional barometer of inflation and a safe haven investment in a crises - could signal that inflation could worsen, and the turmoil in the financial markets may not be over soon.

"We have seen a repatriation into the commodity trade, mostly coming out of the stock market. Commodities are still the one safe play so far this year as stocks have been volatile and not directional. It's been really tough to make money there," said Zachary Oxman, senior trader with Wisdom Financial.