Gold shines for investors

The precious metal has gained favor with investors, reaching record highs in recent sessions.

NEW YORK (CNNMoney.com) -- Gold prices have gained luster as of late and many expect it to keep shining as investors look to hedge themselves against the threat of inflation and a weak U.S. dollar.

The price of gold surged $44, or 4%, this week to settle Friday at $1,048.60 an ounce, just shy of its all-time high of $1,056.30 an ounce set the previous day.

Gold has been on a tear since prices rose firmly above $1,000 an ounce last month. But the precious metal is in the midst of a decade-long bull market, climbing from an average price of less than $300 an ounce in 2000.

Given the current momentum, many analysts expect gold to keep pushing higher.

"We continue to believe that gold fundamentals are attractive and forecast prices to average $1,150 per ounce in 2010," analysts at Deutsche Bank wrote in a research report.

But not everyone is buying the golden bull scenario. "It's not based on fundamentals" said Tu Packard, senior economist at Moody's Economy.com. "As we've seen with bubbles in the last few years, you have the expectation that gold prices will go higher, so people pile in and prices go higher," she said. "The danger is that you overshoot."

Investors flocked to gold in February and March, driving the price above $1,000 an ounce, as stocks plummeted on worries about the government's ability to pull the nation out of a deep recession. By April, prices were back below $800 an ounce as the economic outlook improved and stocks recovered.

This time around, investors are buying gold because they think the government will not be able to reverse its stimulus measures in time to prevent a bout of inflation as the economy recovers.

But the market's preoccupation with inflation is largely speculative and policymakers are well equipped to deal with that problem if it does arise, Packard said.

"It's easier to take the wind out of inflation than to solve deflation," she said. "Right now the problem is deflation."

In addition to concerns about rising consumer prices, gold is being supported by bets the dollar will continue to deteriorate. So far this year, the greenback is down about 7% against a basket of currencies.

The dollar's decline comes as investors flock to higher yielding currencies in response to better economic news. The dollar slumped to a 14-month low earlier this week after the Royal Bank of Australia became the first G-20 country to hike interest rates.

But the gold market may have overestimated the dollar's weakness. According to Packard, the value of the trade-weighted dollar is where it was two years ago.

What's more, the softer dollar could be a boon for U.S. manufacturers who sell goods overseas. "A weaker dollar certainly gives American exporters a competitive advantage," she said.