With the outlook for the dollar almost universally negative right now, it's no surprise that gold prices are sitting at 16-year highs.

But analysts say the enthusiasm over gold and gold stocks could be reaching a short-term crescendo.

Since the dollar began its most recent descent in May, gold prices have jumped about 20% while the

Amex Gold Bugs Index

(HUI) has surged twice that amount. At the same time, the

S&P 500

has added 7%.

As with most commodities, gold is priced in dollars. So as the greenback falls, gold becomes cheaper and more attractive to foreign investors, hence the recent rally.

"The gold market is very emotional and tends to get big groups of cheering fans on the upside or the downside," said Michael Panzner, head of sales trading at Rabo Securities. "I think at the moment, the auditorium seems a little too packed."

Speculative interest in the yellow metal has certainly been on the rise recently. The net speculative long position increased by 5,148 contracts to 123,001 in the week of Nov. 16, according to data from the Commodity Futures Trading Commission. The gross fund long position rose to a record high.

On Monday, gold prices ended at $449 an ounce, up about 8% since the start of the year and the highest close since June 1988.

But gold prices could retreat over the near term, said David Joy, capital markets strategist for American Express Financial Advisors, as the dollar bounces from an oversold condition. Indeed, the dollar recently fell to an all-time low against the euro and a 4 1/2-year low against the yen.

While Joy believes the U.S. currency is in a long-term downtrend, he thinks recent declines have been exaggerated by the election and the realization that President Bush's policy of "benign neglect" toward the dollar will continue.

In addition, comments from

Federal Reserve

Chairman Alan Greenspan and a G20 policy meeting contributed to the greenback's sharp slide. On Friday, Greenspan tacitly approved a fall in the dollar, saying the current account deficit is unsustainable at more than 5% of gross domestic product. Meanwhile, finance ministers made no mention of the dollar in a communique issued at the end of a weekend meeting, signaling that coordinated action or intervention isn't likely.

The dollar's "recent volatility seems unjustified and could result in a near-term correction," Joy said. "The same could be true of gold, which reflected the slide in the dollar last week by rising another $8.70 to $447."

Patrick Chidley, an analyst at Barnard Jacobs Mellet, also believes that investors who are betting on a continuation of the rally in gold shares might be disappointed over the near term. "Some people think the dollar has gone down too fast," he said. "There's a chance in the short term, you'll get some profit-taking in the gold market."

Panzner agrees. He noted that some of the recent euphoria has been due to last week's launch of the

StreetTRACKS Gold Trust

(GLD) - Get Report

exchange-traded fund. The ETF, which tracks the price of bullion, is the first commodity-based security available in the U.S. Each share represents one-tenth of an ounce of gold, minus the ETF's expense.

"The last time there was a high-profile event in the gold market was back in the spring, when the

Gold Bullion Securities

ETF was launched" on the London Stock Exchange, Panzner said. "However, that event marked an important short-term top in gold, and the price of the metal proceeded to fall sharply in the five weeks that followed."

In the three weeks before Gold Bullion Securities was issued on March 31, the price of gold rallied about 8% to $423 an ounce. By May 10, it had fallen to $375. "Given that gold is overbought ... last week's big event

could turn out to be a case of deja vu all over again," he said.

However, while the gold market is susceptible to a decline over the near term, analysts believe the longer-term outlook remains bright.

Chidley said the huge budget and current account deficits should continue to pressure the dollar over the next two years, which bodes well for gold. Large deficits can lead overseas investors to scale back purchases of U.S. stocks and bonds, which means foreigners are buying fewer dollars.

"A continued weak U.S. dollar, strong supply and demand fundamentals and any inflation that may rear its ugly head are all positive for gold prices," said Ron Coll, an analyst at Jennings Capital.

Coll noted that global production of gold is declining while demand for jewelry remains strong. In the first half of 2004, jewelry fabrication rose 13.7% and analysts say the pace has quickened in the second half.

Coll's favorite stocks include

Placer Dome

( PDG) and

Glamis Gold

(GLG) - Get Report

, although neither are cheap after a 20% run-up this year.

Smith Barney analyst John Hill said he likes

Newmont Mining

(NEM) - Get Report

and recently raised his price target on the stock to $62 from $50. Newmont was last sitting at $49.39, up just 2% since the start of the year. (Smith Barney does have a banking relationship with Newmont.)

Hill said he wouldn't be surprised to see the price of gold move up to $500 an ounce going forward, although his official forecasts call for $425 an ounce in 2005 and $450 in 2006.

"While gold's steep rally will likely be paced by intermittent corrections, the pattern over the past three years is clearly one of notching 'higher lows,'" he said.