What’s up with gold? After posting a brisk three-year climb and hitting a 16-year high of $456.75 last December, the price of bullion has slipped to $421 an ounce. Even a terrorist attack in London on July 7 failed to provoke more than an intra-day boost. Is the rally over?

Not according to the manager of gold funds for Tocqueville Asset Management, John Hathaway, who thinks the bull is simply taking a rest. He points out that gold priced in euros recently hit a new high. It’s simply the strength of the dollar that has caused a consolidation period for bullion prices.

Mr. Hathaway’s fund is off by about 3% this year. He’s doing better than most. Nearly all gold funds have taken their lumps. Of the 22 largest gold funds monitored by an outfit called EagleWing, only Vanguard’s Precious Metals Fund is ahead for the year. Most have sustained losses of 3% to 12%. Why, then, would anyone want to invest in the metal?

The case for gold rests heavily, but not exclusively, on a negative outlook for other storehouses of value. The reserve currencies – the dollar especially, but also the yen and the euro – have long been considered investments for those seeking a safe haven in troubled times. When those currencies come under pressure, investors head for gold.

Consequently, much of the optimism for gold in recent years has hinged on the poor trade picture in America, the consequent export of huge amounts of dollar-denominated debt securities, and the likely drop in the dollar’s value.

Indeed, the rise in gold over the past few years has dovetailed nicely with the dollar’s decline versus the euro and the yen. This year, to the surprise of many market observers, the dollar has staged a significant rally. As a result, while gold has continued to move higher when denominated in euros or yen, the dollar price has drifted lower.

Just recently, positive news on May trade balances and June inflation caused another bump up in the dollar and a swoon in gold.

So is the case for gold totally dependent on a further retreat in the value of the dollar? Not according to Pierre Lassonde, president of Newmont Mining, one of the world’s largest gold mining companies. A ready spokesman for the virtues of gold, Mr. Lassonde was named head of the World Gold Council in 2002.

In an interview with Reuters in June, Mr. Lassonde predicted that the price of gold would hit $525 an ounce by January. He forecasts a renewed downtrend in the dollar, to be sure, but is also relying on improved supply and demand factors weighing in.

Specifically, he forecasts strong world growth and, in turn, excellent industrial demand, while also projecting a continued mild drop in worldwide gold production. The company has predicted that worldwide output will fall as much as 1% this year and next. Mine production was actually off almost 5% last year.

More importantly, demand is growing nicely. Consumption by the jewelry industry was up 5% in 2004 and another 17% in the first quarter. Some experts consider jewelry purchases an investment option in various corners of the world where there are precious few alternatives.

Also boosting sales are two new incremental sources of demand. In any discussion of world growth, the Chinese are certain to be an important factor, and so it is with gold. Investing in or owning gold has only been legal in China since 2002. As that country becomes wealthier, purchases of gold, like art and other items that smack of conspicuous consumption, are likely to take off.

A recent survey shows that China has now become the world’s fourth largest producer and consumer of the metal. Last year, it was a net buyer of about 100 tons a year, accounting for some 3% of world demand, a considerable incremental source.

Another source of incremental demand is ETFs, or exchange-traded funds. These fast-growing investment vehicles consumed 133 tons of gold in 2004, up from 39 in 2003.This year, the number is expected to be far higher. In the first quarter alone, ETFs accounted for some 89 tons, a more than 400% rise year-over-year.

ETFs are likely to continue to expand. Investing in gold can be an excellent diversification move, especially because the commodity’s price moves independently of stocks and bonds. As a result, owning gold can reduce the volatility in a portfolio, as well as enhance overall returns. As Mr. Hathaway says, “ETFs now make that accessible to a large number of investors.”

Because of such considerations, the vice president of Goldline Incorporated, Robert Fazio, encourages his retail investor clients to “put a small portion of their assets in gold as a way of diversifying their portfolios.” His firm trades in physical assets such as bars and coins. When asked where the price of gold is headed next, Mr. Fazio ducks. “We stay away from the prediction game,” he said. “No one can predict the future.” Smart fellow.