Oil and gold prices are now rallying together suggesting the six-month "detachment in their prices" has come to an end, market insiders said. They warn prices of the two commodities may, however, lose correlation again if inflation, or even its fear, seeps into the markets. "Gold gained importance in the past few months as a safe haven. Its demand now seems to be stabilising as most of the markets begin to improve their performance," said Ahmed Al Abdallah, Managing Director and Head of Commodity Research at Gavekal Research Middle East. "A lot of factors, including inflation and easing of crude inventories, would determine the correlation between crude and gold." At the Dubai Gold and Commodities Exchange (DGCX), the price of oil was locked stubbornly low as the bullion rallied and touched the $1,005 (Dh3,691) an ounce level in February this year. In the first three months of this year, oil touched new lows when the bullion hit new highs. On a day when gold was priced above $990 an ounce oil tumbled to $32 a barrel. That phenomenon, unknown previously, is now reverting, a prominent Dubai- based commodity trader said. "The typical reason is that gold is considered a safe haven. And that investors – institutional and individual – have been trying to increase the percentage of gold in their reserves," said Jeffrey Rhodes of the INTL Commodities, a Dubai-based dealer in precious metals. When the DGCX closed for the weekend, gold was priced at $929.6 and oil futures for June delivery were priced at about $58 a barrel. In about a month's time, gold has recovered from the $900 price levels to rally along with oil. It has also followed the upward course of the global equity markets and the prices of base metals. Rhodes pointed out a larger triangled correlation between yellow metal, crude and the greenback. "Mathematically there is no direct correlation between oil and gold prices. The key correlation over a long period of time is between the US dollar and gold. Gold is considered another currency that investors resort to when dollar weakens. Typically a weaker dollar means higher gold prices. And that is an inverse relationship," Rhodes said. A weak dollar has been repeatedly cited as one of the causes behind oil touching $147 a barrel in July 2008. Two factors – namely inventory levels of commodities and fears of inflation – may now determine how strong a correlation gold and oil will have in the coming months. "Gold historically has been a hedge against inflation. It is a safe haven asset of long period," Rhodes said. Al Abdallah said gold and oil may again lose their correlation if long-term inflation fears return. "The fact is fears of inflation are getting worse. But that's not over a short-term period but over a long-term period," he said. Demand for commodities has not picked up even though prices have risen and that may have a negative impact on crude prices putting its correlation with gold topsy-turvy. "The fact is that oil inventories are rising even though its demand is getting weaker and weaker," he said. Recently commodities prices hit their highest level in six months as crude oil hit $58 a barrel and a worldwide rally took long hold among base metals, freight, precious metals, agricultural and soft raw material prices. The S&P GSCI commodity index, a popular basket of raw materials used by big institutional investors to gain exposure to commodity prices, surged above 400 points for the first time since mid-November rising 7.5 per cent on the week. On a long-term basis, oil and gold have shown marked correlation. In stark terms, oil prices have exploded and gold prices have shown marked appreciation. From the mid-1970s to 1980, oil prices rose from around $20 per barrel to more than $100 per barrel in 2008. Gold quadrupled in price during that period.

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