New York: The price of gold has not fallen as sharply as the price of crude oil and other cyclical commodities during the global financial crisis, and bullion should strengthen relative to other commodities as economic troubles deepen.
Gold bullion has dropped 16 per cent since October after a recent wave of fund degearing, but its oil purchasing power, a key gauge of economic strength, is at its highest in nearly two years and is holding up against equities and other asset classes.
The precious metal's unique monetary functions as an inflation hedge and safe haven have not been tainted, fund managers said.
"Right now you would rather be long gold than short oil because you are still heading into a direction where gold will continue to buy more of everything," said Greg Orrell of California-based OCM Gold Fund.
Orrell said a key difference between gold and oil is that oil is produced for consumption and will eventually deplete, but gold accumulates over time.
An ounce of gold on Friday bought 12 barrels of oil, its highest price since January 2007. When oil peaked at a record near $150 per barrel in July, the gold-to-oil ratio was 6.6. Gold's weakest point relative to oil was in 2005 at just over 6, and its long-term average was about 15.
Historically, gold tends to rise in tandem with oil. Investors use the metal as a hedge against inflation because bullion's intrinsic value is not tied to any paper assets.
Gold also has risen against major industrial commodities such as copper and nickel.
In October, Deutsche Bank said the gold-to-nickel ratio, a key indicator of economic performance, could fall into single digits in the case of a deep recession as deep as that of the early 1980s.
Gold's rise against oil in the second half of this year was a result of "recession trade" by investors, said Caesar Bryan, portfolio manager of GAMCO Gold Fund in New York, who manages $250 million assets.
