Is gold the next asset class to boom?

Around the world commodity prices have been moving upwards over the past three years. It is not a straight line, but the trend is very, very clear.

Oil is easily the world's most important industrial commodity, and its price spike last week to almost $58 a barrel came as Goldman Sachs pointed to an upcoming multi-year period of high prices with a potential $105 per barrel peak.

Yet this investment story is well known. The art of good investment is to spot the asset class that should have risen with oil, but has not yet done so.

Gold is the obvious candidate. In the 1970s when oil prices surged to levels comparable with today and well beyond in relative rather than absolute terms, gold prices shot from $100 to $850 an ounce in 1979.

The link between black gold prices and the yellow metal is well established. What appears to have been holding gold back in recent years - although it is up by more than 60% in three years - is a perceived connection with the dollar as a proxy currency: if the dollar gets weaker then gold gets stronger and vice-versa.

This link will surely breakdown soon. The price of oil in terms of gold is still very cheap. It maybe that disruption in global capital markets due to higher oil prices is the catalyst that will change this relationship. It is certainly overdue, and an anomaly that markets will correct.

Then the investment funds that have driven commodity prices higher and higher this century will fasten upon gold as the missing commodity, and take prices very much higher.

How high could gold prices go? Well, to reproduce the previous high of 1979 - and most commodity cycles do eventually retrace a previous high before going higher - then gold would need to be $1,600 an ounce compared with $426 an ounce at the time of writing.

Interestingly gold is still very much out of favour in financial circles, and the conventional wisdom is that gold is for jewellery and not much else.

But any contrarian investor would also seize on this as a further endorsement of the case for gold, given that the experts are usually wrong and generally miss out on the next investment theme until it has past.

For anyone who doubts the undervaluation of gold at the present time, I recommend Dr Marc Faber's excellent book 'Tomorrow's Gold' which explains the macroeconomic argument in some detail.

But basically the creation of credit is out of control in the world and paper money can be printed while the gold supply is fixed; hence the value of gold relative to an expanding paper money supply just has to go up!

Thus for investors looking to diversify risk and tap into the next major investment theme acquiring a little physical gold or shares in top gold mining companies is worth considering before everyone is doing it.

The downside risk is also limited as gold always has a residual value unlike shares, and is practically indestructible.