Ask TheStreet: Glittering Gold

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Why has gold turned into such a popular investment all of a sudden? Thanks, D.M.

Gregg Greenberg: Like Dorothy on her way to Oz, investors have closely been following the yellow brick road of late. Even after its recent price drop from more than $700 an ounce in early May to its recent levels near $585, gold is still up more than 30% since last year, and some experts think the precious metal could still move much higher.

How much higher? Well, even the wizard himself would have a difficult time answering that question precisely. One place he may tell you to look for clues, however, is at the declining dollar.

Traditionally, the demise of the dollar is what sends investors scurrying for an asset class that will retain its value even in the face of rampant inflation. During the late 1970s and early 1980s, for example, rising oil prices sparked double-digit inflation in the U.S. The result was a flight to gold that ultimately pushed the price to a record high of $875 an ounce in January 1980.

Over the course of the 1980s and 1990s, however, gold prices were stuck in a rut as the Fed stamped out inflation. But gold started to pick up steam in 2002 as the dollar started its long fall against the yen and the euro, mostly because of worries that the U.S. deficit was growing out of hand.

The greenback rebounded in 2005, yet has resumed its downward slide so far in 2006 as the government continues to borrow -- and print -- money to pay for things like Hurricane Katrina relief and the Iraq war. Gold has not exactly traced the path of the dollar this year because widespread speculation has created a more volatile environment, but the links between the dollar, inflation and the shiny metal still apply.