by Michael J. Kosares

Oil and gold have had a long association in the minds and hearts of investors. Where one goes, the other seems to follow. So when OPEC made its announcement last week to maintain production at current levels, gold market participants might have taken it as a suggestion that gold would be basing at just under $1000 instead of forming a top. When comparing oil and gold on the inflation-adjusted charts, however, there appears to be more to the story than the possibility that we have reached an interim bottom.

As you can see, the oil price is now approaching its all-time high adjusted for inflation at near $105. Simultaneously gold clearly remains at less than half its inflation-adjusted high of over $2300 per ounce. What's more, looking back to the stagflationary 1970s, an era many economists equate with our own, gold rose at roughly twice the rate of oil. Now gold is rising at roughly half the rate of oil. In other words, if historical balance is to be retrieved in the months and years ahead, gold will not only have to rise with oil, it will have to rise faster than oil.

One explanation for the current disequilibrium between gold and oil is that OPEC has become a more effective cartel, while gold is just now breaking the bonds of decades of price management (intended or not) at the hands of the mining companies, bullion banks and official sector. If both are dancing to the same tune of currency inflation, as they did in the 1970s, then something may be about to break.

Such imbalances are rarely overlooked by professional traders and that may be at the heart of why interest in gold has picked up significantly with institutional investors, pension fund managers, et al in recent weeks. In addition, with the financial system under assault and real estate on the ropes, the commodity complex in general looks primed to become the repository for hot global capital looking for a place to park.

Along these lines, it was not surprising to read a New York Times report that Calpers, the largest pension fund in the United States, is about to increase its commodities commitment sixteen times to $7.2 billion through 2010. Nor did I take lightly the recent comments by Quantum Funds' Jimmy Rogers that he expected gold to continue its rise -- and that $3500 per ounce is not out of the question.

So, will gold play catch-up with oil in inflation-adjusted terms? Will we see gold at $2300 per ounce? My guess is that we will. Clearly OPEC is not in the mood to carry the burden of competitive currency devaluations further. The historic relationship between oil and gold is likely to reassert itself, and it is unlikely that it will be because crude oil took a fall. Gold, when viewed in inflation-adjusted terms, looks like quite the bargain.