Do jumping spot gold prices mean cracks in the economy?

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NEW YORK (CNN/Money) - When gold prices jump, it usually means trouble lurks.

The price of gold hit a 17-year high above $460 an ounce Friday as fund managers and investors around the world -- worried about a possible pickup in inflation, a faltering dollar or geopolitical uncertainty -- placed their bets on the precious metal.

"Gold prices have been resurgent, following oil, inflation data, and fretting over global economic imbalances," Citigroup analyst John Hill said in a note Thursday, adding that gold could easily break $500 by the end of the year.

Hill's forecast is supported by independent gold analyst James Turk, several fund managers and some economists, as inflation concerns, uncertainty about the dollar and strong demand for the metal in China and India all spur gains.

Gold prices have jumped to $465 from $425 an ounce in just two months as inflation jitters have lured buyers, according to David Meger, senior metals analyst with Alaron Trading. Hard assets like gold are considered a safe haven against inflation, which can erode the value of other assets.

The last time a gold rally was tied to serious U.S. economic trouble was in the late 1970s when out-of-control inflation, unrest in the Middle East and an oil crisis pushed the precious metal from $150 to $810 an ounce.

But inflation crippling enough to push gold prices to such heights is not necessarily being reflected in the most recent economic numbers, said Meger.

And gold investors have shrugged off things that would usually dim the metal's luster, such as the recent decline in oil prices, which are still up sharply over the past year, however, and the dollar's surprise rally this year.

Meger notes two other reasons for gold's recent rally: physical demand and speculative buying.

"Reports from the World Gold Council and the consultancy GFMS have cited strong demand," said Meger. The council, an industry group, said last week that demand for gold jewelry in the 12 months ending in June hit $38 billion -- the highest ever recorded for a 12-month period, he noted.

Both Meger and Hill also cited strong demand in India and China

"The Asian community has historically had an affinity for precious metals, and in the current environment that demand has risen in the last year," said Meger.

Technical strength leading to speculative fund buying has also fueled the rally further and faster, Meger said.

"Fund traders traditionally watch technical indicators, and this strong technical environment along with the backdrop of physical demand is enough to draw large fund trading into gold," he said.

While inflation is cited by many for the gold rally, some analysts are willing to go further.

"Gold isn't a hedge against inflation. It's a flight from the dollar, which is much more profound problem," said James Dines, a market analyst and editor of The Dines Letter, a 35-year old metals newsletter.

"Alan Greenspan's rate hikes aren't just to hold down an economic boom. He's trying to bring investors back to the dollar," said Dines.

For example, Citigroup said Middle Eastern oil producers are not putting their petrodollars back into dollar-dominated assets, instead investing in gold.

The shift comes as many investors around the world, including some foreign governments, move away from dollar investments due to worries about the long-term outlook for the U.S. economy.

While the dollar has rallied this year, surprising many investors, it's still lost about 30 percent of its value against other major currencies over the last four years, according to Turk, who also founded the online gold brokerage GoldMoney. "We're still in a long-term, downward trend" in the dollar, said Turk.

That dollar weakness could be inflationary in the short run.

But if it persists, and the U.S. economy weakens, a handful of economists worry that it could actually spark a broader trend of weak growth and falling prices -- in other words, deflation.

"We are seeing the early warnings of the dawn of international deflation," said Dines. "Gold prices are rising because it's a refuge."

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