LONDON (Reuters) - The tumble in the price of oil over the past few weeks may have been exacerbated by hedge funds deciding that it was just too expensive, particularly in relation to gold.

A view of the Mobil oil refinery at Altona in Melbourne, Australia, June 27, 2008. REUTERS/Mick Tsikas

While much of the fall has been put down to an assumption that demand will fall with the slowdown in leading economies, hedge fund specialists say there are also less fundamental reasons behind the move.

Oil’s sharp rise this year -- New York crude had gained as much as 53 percent to a record high above $147 a barrel earlier in July -- has not been matched by gold, which was up just 18 percent on the same period.

That makes oil very expensive by historical standards even beyond its record face value.

“There is a very long-term relationship between gold and oil,” said Will Bartleet, a fund manager at HSBC’s Absolute Returns Service.

One aspect of the relationship is that the price of a barrel of oil is seen by some to be in equilibrium with gold when it is at a ratio of 10 barrels to one ounce.

This was roughly the case in mid-March when gold hit a record above $1,030 an ounce and oil was trading at around $105 a barrel. It was at a slightly tighter 8.7 to 1 ratio at the end of 2007 with oil at $96 and gold at $833 before gold took off.

Since March, however, gold has come down and traded in a relatively narrow range while oil has soared.

The result: The ratio was just 5.9 to 1 earlier this month.

SHORTING OIL

There is evidence that hedge funds noticed this trend, or at least decided that the time had come to get out of the long oil trade they have held for some time.

Hedge funds sold crude oil in the week to July 22 to take a small overall short position for the first time since February 2007, according to the Commodity Futures Trading Commission.

This gelled with Societe Generale’s latest analysis of CFTC data which found hedge funds unwinding their net buying positions in oil at the end of June and heading towards being neutral or net sellers.

At the same time, SocGen found hedge funds to be strong buyers of gold -- up at May levels and not far from those seen earlier in the year in the run up to March.

Since its $147 peak on July 11, oil has fallen as much as 17 percent. It was around $123 a barrel on Monday.

Gold has not responded in equal measure. Spot gold is actually around 6.5 percent off its July peak as is the price of buying into SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund. Both peaks, however, were sharply higher than their end-June levels.

But Monday’s ratio of oil to gold was 7.5 to 1, much closer to supposed equilibrium than a few weeks earlier.

FUNDAMENTALLY SPEAKING

The 10 to 1 equilibrium idea is far from being the only mover of oil, however, and fundamentals have clearly been playing the major role.

Signs that the U.S. and euro zone economies are stuttering imply that demand for crude will slow, taking the edge off some of the main drivers that have sent oil to recent heady heights.

“The robustness of global oil and oil product demand remains under question as a result of higher product prices and weakening global economic growth,” Investec Asset Management said in a recent note.

It also argued that the key to the sustainability of the lower price would be the direction of oil-thirsty emerging market economies, which have held up quiet well so far despite the developed market downturn.

Another factor that could have played into oil's fall is the dollar, which typically has an inverse relationship with crude -- that is, crude falls when the dollar strengths. The greenback has been strengthening against a basket of major currencies .DXY since mid-July as oil has been falling.

The narrowing ratio of oil to gold may, as a result, just have exacerbated moves based on fundamentals or provided a trigger for the sell off.

Meanwhile, if the ratio was to be 10 to 1, gold today should be at $1,230 an ounce or oil should be at $92 a barrel.