With inflation at a new high, investors move towards gold, traditionally seen as a hedge against inflation. But today, experts are divided over movement of gold prices in view of the bouncing back of crude oil. One school of thought says that the existing high crude oil prices at about $64 per barrel would put pressure on gold prices to move up. The other school of thought believes that it will not have much impact on gold prices.

Those favouring rising gold prices point out that historically, there is a direct relation between the price of gold and that of crude oil. Over the past 60 years, one ounce of gold has had the purchasing power of about 15.2 barrels of oil. However, with the ever-increasing price of oil, currently standing at $64 per barrel (as on April 5, 2007), the same amount of gold buys 10.5 barrels ($673.30 as on April 5, 2007).

According to S P Sharma, an economist with a leading consulting firm, “The price of crude oil is unlikely to decline below $60 in the near future. Therefore, the price of gold is likely to rally in the coming months. Historical data shows that when the crude/ gold ratio falls below 11, where one ounce of gold buys 11 barrels of oil, the ratio not only has come back in line with the average but that conjecture drives the ratio above the historical average of 15.2.”

Even if the price of crude oil falls to $60 per barrel, gold prices would appreciate, says Sharma. If the average ratio of 15.2 barrels of oil per ounce of gold is considered, the price of gold will move from $673 per ounce to $900. In case the ratio moves above 15.2 in the coming years, the price could touch $1,000 per ounce, he says.

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