Gold Prices Hemmed In

Gold was caught in an economic tug-of-war Tuesday, with traders weighing a dipping oil price against higher inflation figures out of the U.K., leading to a choppy session.

February-dated contracts lost a dollar to close at $625.90 an ounce on the Comex division of the New York Mercantile Exchange. The bullion exchange-traded funds, streetTracks Gold Shares (GLD Quote) and iShares Comex Gold Trust (IAU Quote), were moving down, off 0.1% recently.

Saudi oil chief Ali Naimi indicated production cuts by OPEC might not be necessary, thus leading to a softer price for crude. Oil dropped $1.78 to $51.21 a barrel. That news provided support for the bear case.

Energy costs are a key component in inflation, and when they fall, the risk of rising prices is mitigated. Gold is bought by some investors as a hedge against inflation.

At the same time, even though reduced energy costs may mean lower inflation going forward, prices were rising their fastest in more than a decade in Britain, with the consumer price index hitting 3% growth in December. Because the advance was well above the Bank of England's target rate of 2%, it was making a bullish case for gold.

"The recent 3% level recorded in Britain means that it takes only about a decade to melt away a third of one's wealth," writes Jon Nadler, an analyst at Montreal-based bullion dealer Kitco, in a research report.

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