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Gold seen outperforming oil as recession brews
By Frank Tang
Friday, November 7, 2008
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 percent since October after a recent wave of fund deleveraging. But its oil purchasing power, a key gauge of economic strength, is at its highest in nearly two years and is holding up relative to 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 deplete one day, but gold accumulates over time.
"For a commodity such as oil, you are getting a reflection of the global slowdown, and that's why it is going down on a relative basis versus gold," Orrell said.
An ounce of gold on Friday bought 12 barrels of oil, its strongest 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.
For a graphic detailing the relative performance between gold and oil, please click:
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.
... Buy gold, sell oil
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.
"As the economy slows and central banks ease, you would expect gold to rally relative to the oil. We are coming off a huge 'buy gold sell oil' signal in the summer -- it was way out of whack," Bryan said.
Data released on Friday showed U.S. employers cut payrolls by a worse-than-expected 240,000 in October. So far this year, 1.2 million U.S. jobs have been lost, bringing the unemployment rate to 6.5 percent, its highest level since 1994.
Year to date, gold was down 12 percent, while crude oil dropped 36 percent and has lost more than 50 percent since it hit a record $147.27 per barrel, and the MSCI All Country World Index index, which tracks the performance of the global equities market, dropped 43 percent.
"We are still in a flight to liquidity rather than a flight to safety," Orrell said.
Other fund managers expressed optimism about gold as global central banks fight a deepening economic downturn.
Brian Hicks, co-manager of the Global Resources Fund at Texas-based U.S. Global Investors, which oversees $2 billion in assets, said the extra money flow related to the stimulus packages could spur inflation and weaken the dollar, which would be bullish for gold.
"At some point you have to wonder how that is going to impact price levels. I think gold will return as a safe haven as we come out of this short-term deleveraging process," Hicks said.
"As we move away from the peak of this financial crisis, we will start to see gold outperform relative to oil," he said.
James Steel, chief commodity analyst at HSBC, said bullion could still rise further but not because of rising price levels.
"We are clearly not in a period of inflation, but that doesn't mean that gold won't trade higher. It's a risky world and there is still a high degree of uncertainty in general as far as paper assets go," Steel said.
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