Gold/Oil Correlation Reasserted But Unstable - Citigroup
Monday October 2nd, 2006 / 18h17

NEW YORK -(Dow Jones)- Gold has recently been taking daily direction from the oil market, while the traditional gold/dollar relationship has faded, said John Hill, an analyst at Citigroup Inc. (C) in a report released Monday.

"Gold correlations are always murky, and famously unstable over time," said Hill, who added that while the oil/gold correlation is likely to continue, it won't be without instability.

He said the oil link reflects the "ebb and flow of investment in broad commodity indices, and the anomalous pull from pro-cyclical basic materials during a period where gold's safe-haven attributes are in abeyance."

Gold's weaker link to the dollar probably reflects no more than a misplaced consensus bearish call on the dollar in the first half of 2006, said Hill. While a weaker dollar is normally positive for gold, he said, a more powerful secular theme is the possibility of a stealth cycle of competitive devaluations, driven by trade imbalances, demographics and entitlement bloat, which would have the effect of boosting hard assets and gold in all currencies.

Meanwhile, said Hill, the historical correlation between the dollar and gold has seen a decoupling again.

"A strong gold, dollar correlation was briefly reasserted in second quarter of 2006 only to fade again in the third quarter," he said. "The latest decoupling is dissimilar to fourth quarter of 2005, when gold rose sharply against the dollar, euro, and yen."

For the gold/oil correlation, Citigroup forecasts West Texas Intermediate crude oil at $55 a barrel in 2008 and gold at $750 an ounce.
"We expect the gold/oil relationship to remain unstable," said Hill.

"Economic slowdown or recession scenarios would likely dampen energy demand, while spurring safe-haven gold buying. Geopolitical tension scenarios would probably boost both."

-By Alison Guerriere Ciaccio. Dow Jones Newswires; 201-938-5959; alison.guerriere@dowjones.com
Monday October 2nd, 2006 / 18h17

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