NEW YORK (CNN/MONEY) - The price of gold remains above $450, the highest level in 16 years. And many market watchers expect the price to go higher still in 2005.

The chief reason for the recent run on gold is the decline of the dollar. Since late 2002, the euro has risen from $1 to $1.30 in value -- and the U.S. dollar has fallen correspondingly against the euro and some other major currencies.

Because of the dollar's reduced buying power, the price of gold over the same period has risen about 35 percent in U.S. dollars. By contrast, gold has gained less than 5 percent in euros.

There are, however, some forces besides currency exchange rates pushing up the price. Gold production doesn't change very fast. So unless central banks start dumping gold, demand determines the price trend.

Jewelry demand is the largest factor, and it has been growing faster than 5 percent a year. Analysts say that rate could speed up as China becomes wealthier, since the Chinese have historically been partial to gold jewelry.

Investment demand, though much smaller than jewelry demand, has been growing nearly 10 percent a year.

Without trying to make a specific price forecast, it seems fairly clear that the price of gold in U.S. dollars will continue to rise until the dollar begins to rebound against the euro.

But does it follow that you should be buying gold?

If you're talking about gold coins, the answer is no, unless you're interested in keeping a small last-ditch emergency fund in your safe deposit box or your want a handful of coins to leave to your grandchildren.

I own some coins myself and I decided to sell some of them earlier this year. Despite the rising market, I barely broke even because of the large bid-ask spreads.

Gold-mining shares don't have that problem, and investing in them through a sector fund can be worthwhile. American Century Global Gold, for instance, has more than doubled over the past three years.

Nonetheless, you wouldn't want to have more than 5 percent, or at most 10 percent, of your money in such a narrow type of fund.

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The real underlying question is whether you need protection against the possibility of an unanticipated upsurge in inflation or an unexpected nosedive in the dollar.

The answers to these questions should really motivate a much broader analysis of your portfolio. Do your own assets, such as long-term Treasury bonds, that would be particular victims of rising inflation or a falling dollar? And do you own anything that would provide counterbalance.

If it turns out that you have no inflation protection, then consider building up the inflation hedge portion of your portfolio. Whether you do this with real estate investment trusts, metals and mining companies or energy stocks will depend on what specific opportunities you can find.

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Some of the obvious stock groups are already up a lot. The T. Rowe Price New Era fund, the traditional benchmark for inflation hedge investing, has risen more than 50 percent over the past two years.

Don't chase stocks that are already up, especially since a reversal in the dollar could deflate a lot of these share prices.

But it has become clear that after more than two decades of not having to worry about a sustained uptrend in inflation, rising prices are a possibility again. And you should be on the lookout for opportunities to hedge your portfolio when you can do so without overpaying.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.