Gold prices and the U.S. dollar, however, don't have a perfect inverse correlation. As the European sovereign debt crisis ballooned throughout 2010, investors fled into both gold and the U.S. dollar as a safe-haven asset.

Over the past two years, as the chart indicates, there have been times when gold prices have made new highs despite dollar strength, so for some analysts a stronger yuan leading to higher gold prices is not necessarily a foregone conclusion.

A stronger yuan also means that Chinese goods will cost more to sell in other countries. This shift could hurt overseas sales and stifle the disposable income of the fledging middle class, which is made up of typically strong gold jewelry consumers. Currently China's per capita gold consumption level lags behind most other major gold buying countries.

Many analysts believe that gold consumption per capita will grow as the Chinese middle class keeps buying gold jewelry as gifts for holidays, weddings and celebrations. Any crimp in their disposal income could curb demand and weigh on prices.

For the short term, most analysts expect gold prices to stay volatile. Gold settled at a record level Friday of $1,258.30 an ounce and rose 2.3% last week. The popular gold exchange-traded fund, SPDR Gold Shares ( GLD), added 1.83 tons to a record of 1,307.96 as investors loaded up on the precious metal. Higher prices can trigger profit taking but on the flip side headline risk could boost demand for gold as a safe haven asset.

A supporting factor for higher gold prices was also a report from the World Gold Council that Saudi Arabia increased its gold holdings by 125% to 322.9 tons from the first quarter of 2008 to the first quarter of 2010.

The shift is being attributed to a host of reasons from an accounting error to a shift in asset diversification. Based on these figures, Saudi Arabia's gold holdings still account for just 3.5% of the country's total gold reserves, as compared to the U.S. which has 74%. Saudi Arabia's reallocation illustrates the shift of central banks from being net sellers of gold into net buyers.

Waiting in the wings is the release of the EU nations' bank stress tests in July. Any bad news could spook already jittery investors and trigger another flight to safety into gold.

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