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FUND VIEW-Gold likely to extend its lead over sluggish oil

Published 11/25/2009, 05:32 AM
Updated 11/25/2009, 05:39 AM
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* Gold, silver have room to rise; oil faltering

* Oil skipped chance to become substitute currency

By Ikuko Kurahone and Barbara Lewis

LONDON, Nov 25 (Reuters) - Massive oversupply in the oil market has helped to snap the link between oil and gold that at this stage of tentative economic recovery could send both assets rising as inflation hedges, a strategist at a privately-held fund said.

He predicted gold would carry on climbing and silver also had much to gain, but oil, which so far has stalled at around $80 a barrel, would struggle to register further gains.

"I would say the problem is supply overhang," said David Morrison of GFT said of the oil market.

"This historical relationship between oil and gold is broken."

Analysts have long disputed the strength of the connection as the two markets have frequently been influenced by other factors, but both are regarded as inflation hedges.

Morrison declined to specify how high gold could go, but noted gold, which hit a record $1,180 an ounce on Wednesday, was still below its all-time inflation-adjusted high of more than $2,000 struck in 1980.

Silver has been trading at around $18 compared with a record of $50 touched fleetingly in 1980, according to figures from consultancy GFMS.

Oil is also far below its record of nearly $150 touched in July last year, but reduced demand as a result of economic downturn has led fuel stocks to climb much higher than the five-year average.

In addition to stores on land, millions of barrels of refined oil products have stacked up in floating storage at sea.

For gold, fundamentals of supply and demand are typically less significant than for oil.

Instead its rally has been largely sustained by the weakness of the U.S. dollar and expectations of inflation, driven in part by stronger oil prices compared with a low of just above $32 a barrel hit in December last year.

Gold has also benefited from more general currency weakness.

"It's about competitive evaluation," said Morrison, who works for a London arm of the U.S. company.

CURRENCY SUBSTITUTE

During the record rally, some in the market believed oil, which can also have an inverse relationship to the dollar, could join gold in acquiring the status of a substitute currency -- or even usurp its role.

"Without a doubt, people were pouring money into risky assets and looking to alternatives to the dollar in what was a low-rate environment and looks like a low-rate environment for a long time to come," Morrison said.

"Oil would have been the natural place for investors to hedge against the dollar rather than the old favourite of gold. Gold had fallen out of fashion. It has no use. We absolutely depend on oil."

What has not changed is the low rate environment and the perceived need for an inflation hedge, even though inflation is not considered to be an immediate concern and oil's impact on driving up prices has been muted by increased energy efficiency.

GFT is seeking to hedge inflation and generate returns for mostly retail investors. They could range from hairdressers to dentists, said Morrison, whose career has included working as a floor trader before the days of electronic dealing.

The fund, which specialises in foreign exchange and contracts-for-difference -- which allow investors to trade the difference between assets, such as oil, for delivery now and at a future date -- posted revenue of $164.7 million in 2008, marking 173.4 percent growth from 2005.

A privately-held company, it did not provide further details. ((Editing by William Hardy, ikuko.kurahone@thomsonreuters.com; +44(0)20 7542 8145; Reuters Messaging: ikuko.kao.reuters.com@reuters.net))

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