Gold Prices Reverse Direction, Settle Up

NEW YORK (TheStreet ) -- Gold prices reversed earlier losses Thursday as investors bought both riskier stocks and gold while technical traders loaded up on the precious metal.

Gold for August delivery settled $3.80 higher to $1,195.60 an ounce at the Comex division of the New York Mercantile Exchange on low volume. The gold price Thursday has traded as high as $1,201.20 and as low as $1,180.70. The U.S. dollar index was losing 0.71% to $82.58 while the euro was rallying 1.10% to $1.29 vs. the dollar as traders bet on the euro ahead of the Friday's "stress tests" results from 91 European Union banks. The spot gold price was rising more than $9, according to Kitco's gold index.

Risk appetite was improving Thursday on better-than-expected earnings from U.S. companies, which helped stocks and also boosted gold prices. The eurozone manufacturing numbers for July beat expectations and European Union May industrial new orders also rose an unexpected 2.5% year over year. The upbeat data offset Federal Reserve Chairman Ben Bernanke's Wednesday remarks which described his economic outlook as "unusually uncertain" as well as rising weekly initial jobless claims.

Bernanke wrapped up his testimony to the Committee on Banking, Housing and Urban Affairs Thursday. During his two-day testimony, Bernanke reiterated that inflationary pressures aren't a near-term concern. Those investors who were buying gold as a hedge against immediate inflation might have sold some of their positions, which gave a chance for technical traders and bargain-hunters to buy gold at "discount" prices. Gold still needs to close above $1,205 an ounce, however, for prices to move significantly higher.

Bernanke's insistence that inflation is not a worry highlights the fact that deflation might be. High unemployment and stagnating prices might be a deflation cocktail, which, some believe, will give gold prices a strong boost over the long term.

"Deflation, like inflation, means a crisis in money, and gold is always well-bid amidst monetary instability, let alone fear," argued Adrian Ash, head of research at BullionVault.com.

As deflation destroys capital and purchasing power, investors might need a safer place to preserve the wealth. Weak currencies typically lead to higher gold prices as gold is a form of money that retains some type of value. A weak dollar is another factor helping gold prices today as the dollar-backed commodity is now cheaper to buy in other currencies.

One wild card waiting in the wings for gold, especially the U.S. gold investor, is a provision in the Patient Protection and Affordable Care Act. Under the code, the Internal Revenue Service will be able to widen the Form 1099, used to monitor supplementary income and self-employed earnings, to include gold sales over $600.