With the oil price falling more than 10 percent over the past few days – a level sufficient to be termed a ‘correction’ – the gold price has also suffered, but not nearly to the same extent percentage wise, at least so far. This could be taken as an indication of a beginning of the mooted decoupling of gold from the oil price which would have to happen if gold is to be the answer as a true hedge against inflation and economic carnage.

In reality though, oil is a commodity and just like any other commodity is primarily subject to supply and demand considerations, while gold is, despite the views of some figures in the Central Banking community, a currency. Gold is still ‘money’ as far as much of the world is concerned and thus behaves differently from most other metals.

Oil price fundamentals are not supportive of a continuing price surge. A very significant fall in U.S. gasoline consumption over the past few months as drivers have been beginning to experience European style petroleum prices, coupled with increased oil output from a nervous Saudi Arabia – and a market which was probably not in deficit anyway – has outweighed developing nation growth. After all the U.S. is the world’s most profligate oil consumer and a 5 percent fall in gasoline usage there represents more than a 1 percent fall in world consumption. And the U.S. decline in consumption will continue. Gasoline was cheap. It is not now. And if anything will drive the U.S. public towards more economic vehicle usage, and lower consumption, $4 a gallon gasoline most certainly will.

European usage is also declining as the combination of higher oil prices and soaring inflation is putting a dent in automobile journeys here too – a pattern being seen across the world.

All this suggests that the overblown oil price is due for a slump – perhaps back to the $100 level or lower, which would bring a collective sigh of relief to those responsible for the economies of most nations around the world. Gold, on the other hand, although it has been seen to be tracking oil of late, should be in an entirely different category as far as investors are concerned. Economic turmoil, not just inflation – although the two may be going hand in hand at the moment – tends to help boost the gold price, with gold as a portfolio diversifier, and there is little indication that the current economic malaise is anywhere near over yet.

While the turmoil continues, the US dollar, currency of the country which started it all, will likely remain weak, although as we pointed out yesterday other countries’ currencies will also weaken as economic instability hits them too which may seemingly help the dollar reverse its decline against a currency basket. But with gold perhaps the ultimate indicator of dollar weakness or strength, its price should strengthen, even as the oil price drops.

Those who mistakenly perhaps see the oil and gold prices linked as indicators of dollar weakness, may mark the gold price down as oil falls back, but this should be shortlived. Oil should be subject virtually in its entirety to the laws of supply and demand. Gold remains, in our view, in a different category altogether, although not totally immune to supply/demand balance factors.

Historically though, the gold price per ounce: oil price pr barrel ratio has been around 10:1. This suggests oil has a way to fall, or gold needs to rise – or perhaps a combination of the two may be the most likely short to medium term scenario.