Gold to catch-up with oil as inflation brews

By Frank Tang - Analysis

NEW YORK (Reuters) - The specter 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 U.S. Federal Reserve's decision this 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 in Upper Saddle River, New Jersey.

On Thursday, U.S. gold futures soared nearly 4 percent, 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 percent after it hit a record high of $1,030.80 on March 17, bullion is still up 10 percent year to date, compared with a 12 percent decline of the broad-based global equities MSCI ACWI index. .MIWD00000PUS

On Friday, the U.S. blue-chip Dow Jones industrial average .DJI was at one point more than 20 percent below its October 2007 peak, on the brink of Wall Street's definition of a bear market, while U.S. futures for August delivery ended nearly 2 percent higher at $931.30.