Like Dorothy on her way to Oz, investors have been following the yellow brick road lately. Gold prices are up over 5% since late July and gold funds have added 15% over three months.

And just like Judy Garland's character in the movie, gold investors have attracted some curious friends on their journey. No, not the Scarecrow or the Cowardly Lion. Bonds and oil -- assets not normally linked to gold prices -- have moved in lockstep with gold's climb.

As the price of gold has jumped to a recent $416, bonds and oil have rallied as well. Illustrating the jump in bond prices, the yield on the benchmark 10-year Treasury -- which falls as prices rise -- has plummeted 60 basis points in two months, returning to the 4% level. Meanwhile, oil has pierced the milestone $50 mark after growing comfortable in the $40-a-barrel range.

So how much higher can gold rise, and will its new traveling companions stick along for the ride?

Well, even the wizard himself would have a difficult time answering those questions in today's environment. That's because the two primary forces that traditionally underpin gold's ascent -- a declining dollar and rising inflation -- seem curiously absent.

"Ultimately, the most important thing in the gold market is the dollar," says Mark Albarian, CEO of precious metals dealer

Goldline

. "And even though it has not fallen substantially yet, the anticipation is that the dollar is going down." Albarian predicts growing federal deficits will ultimately sink the dollar, pushing gold prices up 20% from their current levels.

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.

"Gold is a function of what can go wrong," says Jean-Marie Eveillard, portfolio manager of the

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First Eagle Gold fund. "It is the ultimate hedge."

Oddly, for all the comparisons between today's economy and that of the last days of disco, the dollar has curiously held steady, mostly trading sideways over the last year against foreign currencies. A number of portfolio managers say the dollar's resilience is partly a function of the

Fed's

"measured" rate hike policy. Higher rates make dollar-denominated securities more attractive to foreign buyers. In order to buy higher-yielding U.S. securities, foreign buyers must buy U.S. dollars, thereby supporting the price of the greenback.

But once again, reality is more complicated. Despite Greenspan's saying the economy is healthy enough for rates to be lifted, the all-knowing bond market does not seem to believe him. As a result, bond prices have been strengthening in response to their skepticism.

"Higher U.S. oil prices mean a slowdown in the economy," says Tom Winmill, portfolio manager for the

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Midas fund. "And a slowing economy causes rates and the dollar to remain low, which in turn causes the price of gold to go up."

Winmill expects gold to break $500 an ounce in the next year as a result of a serious deceleration in the economy. Some of his fund's largest holdings are the Canadian precious metals miner

Wheaton River Minerals

(WHT)

and Colorado-based

Newmont Mining

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.

Rising inflation, the other lever that traditionally pushes gold higher, has also emerged as a phantom force. Though housing and energy prices continue to skyrocket, government measures like the consumer price index haven't reflected an alarming rise in inflation.

Explanations for the lack of pricing pressure have run from Chinese imports to Indian outsourcing, but many gold fund managers are not buying them. Instead, they say the CPI is outdated and economists need to look no further than the commodities markets to see prices spiraling higher.

"The bond scenario is incorrect, and rates should not be falling," says Graham French, portfolio manager for the

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Vanguard Precious Metals & Mining fund. "There are quite serious old inflationary pressures going on and the bond market is seeing right through them. Commodities like gold are acting correctly by heading higher."

But other portfolio managers like First Eagle's Eveillard are hesitant to lump gold in with other commodities like copper, due to its historical relevance as the currency of last resort.

"Gold is not your average commodity like pork bellies," says Eveillard. "It has had and continues to have a monetary role that central bankers choose to ignore."

President Nixon officially delinked the U.S. currency from gold in 1971, but the Federal Reserve has refused to purge the nation of its gold supplies for hard cash. Eveillard regards this as symbolic of the central bank's view of gold as the currency of last resort.

Eveillard's fund has 11.5% of its assets in gold bullion and the rest spread across mining companies worldwide, including nearly 5% in Canada's

Placer Dome

(PDG)

. Eveillard says the difference between holding the bars and holding shares in mining companies is leverage. Mining companies have typically moved 30% for every 10% move in the price of gold.

Vanguard's French, however, dismisses the notion of a link between gold and currency, saying, "It's a commodity like any other commodity. Don't buy it if you think the world is coming to an end -- buy puts on the market instead."

French reminds investors that gold equities suffered along with other stocks during the market crash of 1987. He says gold is fairly priced at current levels, but other less precious metals like nickel and copper can still move higher.

Even as a straight commodity, gold continues to defy long-held market beliefs, including the most basic tenets of supply and demand. Joseph Foster, portfolio manager of the

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Van Eck International Investors Gold fund, says "investment demand" -- or the use of gold as an alternative asset class to stocks and bonds -- is driving up gold prices. With bond yields at all-time lows and stocks meandering, it's hard to begrudge investors looking off the beaten path. Foster sees gold testing the $430 mark in the next six months on its way to $500 an ounce.

If demand for gold as jewelry or any other tangible use is secondary, however, that means gold might not be the store of value investors imagine. Without real demand supporting the price, gold could once again be left to the gold bugs as the rest of the investing community swaps into the latest hot commodity. Or even moves back into stocks and bonds.

So if actual supply and demand can't stop gold's rise, what will it take?

"World peace, lower deficits and a dramatic drop in the cost of the Iraq war," says Goldine's Albarian half-jokingly.

Well, that sounds more like a job for Superman than the Wizard of Oz.

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