Updated from 7:13 a.m. EDT

Contrary to popular intuition, the relationship between the performance of gold and equities is tenuous, at best. So the fact gold has rallied 15% since April 7 amid the stock market's robust rally isn't so strange. Actually, it's readily explainable given the very strong inverse relationship between gold prices and the dollar.

Why stocks have rallied as the dollar has recently tumbled is more complicated, but the relationship between the dollar and gold makes sense "since identical monetary factors and inflationary expectations drive the two," as RealMoney.com contributor Howard Simons once explained.

Near term, the dollar might soon reverse its recent fall. Why? Because it's technically oversold, central bankers in Europe and, especially, Japan don't want to see it fall further, and U.S. economic data might show improvement. Given that, the odds are rising gold will soon suffer a setback. Notably, the yellow metal has retreated from Wednesday's high of $373.50, settling in New York on Thursday at $368.10 per ounce. The overall trend, though, would appear to favor gold.

"Gold is reaching a decisive area at the moment," according to James Moore of TheBullionDesk.com, a Web site dedicated to precious metals. "If gold can breach $375, we could well see a sharp rally toward the year's highs around $390," but failure to do so could trigger "a phase of liquidation" that pushes gold back to the $358-$362 area. (Early Friday, gold was trading above $370 per ounce as the dollar sank anew, especially vs. the euro, which traded above $1.18 for the first time since the day after its introduction on Jan. 4, 1999.)

Less optimistic forecasters see gold retreating into the $330 area, or perhaps retesting the April lows under $320 per ounce. The latter scenario would likely coincide with much better-than-expected economic data, perhaps enough to forestall another rate cut, which would likely strengthen the greenback.

Short-term considerations aside, longer-term fundamentals continue to point toward a weaker dollar and stronger gold prices.

The Dollar's Trend Is Gold's Friend

More prominently, the Bush administration and the Federal Reserve seem to agree a weaker dollar will cure America's economic ills or, at least, stave off deflationary pressures. As an aside, recent action in both the dollar and gold seem to discount the deflation scenario.

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