NEW YORK (Reuters) - The specter of inflation and a bear market in equities is a powerful formula to rekindle investor interest in gold, which looks to be staging a catch-up rally after lagging other commodities in 2008.

Bullion, which has often moved in lock-step with oil because of the metal’s appeal as a hedge against inflation, has in the last several months parted ways with the energy and grain markets, which have soared to record highs.

Yet, in the wake of U.S. Federal Reserve’s decision this week not to raise interest rates but its warning that inflation is a growing threat, a sudden resurgence in gold appears to have revived its positive correlation with oil.

That should mean gold benefits as resurging inflation continues to wreak havoc for the stock markets, erode the value of the dollar and drive equity investors to seek returns elsewhere.

“The recent rise in the gold market shows that uncertainty and fears still exist out there, and the inflation concern due to the lack of a definite Fed statement was a big plus for the metal,” said Bill O’Neill, managing partner of commodity firm LOGIC Advisors in Upper Saddle River, New Jersey.

On Thursday, U.S. gold futures soared nearly 4 percent, posting the biggest one-day gains in dollar terms since 1985, as financial market worries and record oil sent global stocks tumbling.

Even though gold has lost 10 percent after it hit a record high of $1,030.80 on March 17, bullion is still up 10 percent year to date, compared with a 12 percent decline of the broad-based global equities MSCI ACWI index. .MIWD00000PUS

On Friday, the U.S. blue-chip Dow Jones industrial average .DJI was at one point more than 20 percent below its October 2007 peak, on the brink of Wall Street's definition of a bear market, while U.S. futures for August delivery ended nearly 2 percent higher at $931.30.

O’Neill, whose firm has halved its gold investment since March, said bullion’s bottom at $845 on May 2 should be the lowest level of this year.

GOLD-OIL LINK RESUMING?

Meanwhile, gold should soon rise in tandem with oil after their positive link was temporarily broken by a dollar rally in the past several months, market watchers said. Gold is also seen as an alternative currency to the greenback.

Indeed, the correlation between bullion and oil was a negative 0.46 after gold’s hit a record in March, sharply different from a positive 0.87 in the last 20 years, according to Reuters data.

Thomas Winmill, portfolio manager of the $225-million Midas Fund MIDSX.O, said that the gold/oil ratio has only be so skewed in favor of oil in two cases since 1979, and each time it was followed by a rally in gold, a recent study by research firm Ned Davis showed.

Also, gold’s oil-buying power is at its lowest now after oil has rocketed nearly 50 percent so far this year. On Friday, an ounce of gold only bought only 6.53 barrels of oil, which is the lowest level since 2005. In March, an ounce could buy more than 10 barrels of oil.

The recent rise of gold - a traditional barometer of inflation and a safe haven investment in times of crises - could signal that inflation could worsen, and the turmoil in the financial markets may not be over soon.

“We have seen a repatriation into the commodity trade, mostly coming out of the stock market. Commodities are still the one safe play so far this year as stocks have been volatile and not directional. It’s been really tough to make money there,” said Zachary Oxman, senior trader with Wisdom Financial in Newport, California.

Robert Lutts, president and chief investment officer of the $500-million Cabot Money Management in Salem, Massachusetts, said he expected more investors to buy gold as a portfolio diversifier, and bullion products would be offered as part of more 401-K programs and pension plans.

Lutts, who recommends his clients to own 5 to 10 percent of their investments in precious metals products, forecast gold could hit $1,500 within the next 3 years.

Others fund managers cautioned that the commodity market could be volatile and there are risks associated with any investment.

"There is no such thing as a safe asset anymore. Cash is not a safe asset, and commodity is just one way to diversify in a world where there is no safe haven," said Axel Merk, portfolio manager of Merk Hard Currency Fund MERKX.O in Palo Alto, California, who manages $400 million of assets.