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Gold: Don't count on $1,000

With oil prices rising and the dollar weakening, gold has climbed back above $900. But there's not much more headroom.

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By Paul R. La Monica, CNNMoney.com editor at large

Although gold has pulled back from its record levels, prices are back above $900 an ounce thanks to a weak dollar and sky-high oil prices.

NEW YORK (CNNMoney.com) -- Don't look now but the price of gold is back above $900 an ounce.

Gold, which typically rises during times of economic uncertainty and inflation, hit an all-time high of more than $1,030 an ounce back in mid-March.

The price started to slip soon after that as credit crunch fears subsided. But it has been back on the rise this week partly due to the dollar's weakness and stubbornly high oil prices.

A week ago, gold futures were trading at $866 an ounce. Today, they hit nearly $909 in mid-morning trading. That's a 5% jump in just a couple of days.

So will gold prices keep rising? And what should investors do about it?

There is a case to be made that gold prices will continue to rise modestly. Demand for gold is still strong in many emerging markets. As such, profits for many gold miners are expected to double this year.

Still, most financial planners and market strategists say that people should only have a very small percentage of their portfolio dedicated to gold. It is, after all, an incredibly volatile investment. And betting on gold often means that you're taking a leap of faith about currency and interest-rate fluctuations as opposed to looking at fundamentals like sales and earnings growth.

But based on how well the gold market is doing this year, it's not a bad idea to have some exposure to gold given how it is typically a hedge against inflation.

Gold prices are up nearly 9% year-to-date. Not surprisingly then, gold stocks, mutual funds and ETFs have been some of the market's better performers during this tumultuous year on Wall Street.

According to fund tracker Morningstar, precious metals funds are up 1% year-to-date compared to a 8.5% loss for the S&P 500. And top mining stocks such as Goldcorp (GG), Agnico-Eagle Mines (AEM) and Yamana Gold (AUY) have each gained more than 10% in 2008.

Nonetheless, investors probably shouldn't expect a return to $1000 in the near future.

Keep in mind, when gold hit its all-time high, the overall market was in a panic about whether Bear Stearns would collapse.

Barring another major scare to the market like that, it's hard to imagine that gold will shoot up to a new record, especially if the Fed does actually raise rates later this year, a move that could help strengthen the dollar and lead to a pullback in commodity prices.

"I don't think we're going back to $1,000 levels," said Keith Walter, co-manager with the Julius Baer Global Equity fund. "There is a wide pricing disparity between gold and oil but I think that will narrow with crude coming down, not gold catching up."

In addition, Walter said that although global demand is still strong for gold, there are concerns that China's economy may be starting to slow a bit. That could dampen gold prices.

"We've been pleased with our investments in metals and mining but we're cutting back though because we're starting to see cracks in the Chinese economy," Walter said. As such, he said his fund has reduced its exposure to mining stocks. It still owns several though, including Newmont Mining (NEM, Fortune 500) and Freeport McMoRan Copper & Gold (FCX, Fortune 500).

So even though investing in gold and gold mining stocks may be a good idea for a long-term portfolio, now's not the time to go overboard and make too a big bet on all that glitters.

Issue #1 - America's Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.

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