Gold Prices Look to Federal Reserve

NEW YORK (TheStreet ) -- Gold prices lost steam Monday as risk appetite improved ahead of the Federal Reserve's FOMC meeting.

Gold for December delivery settled down $2.70 to $1,202.60 an ounce at the Comex division of the New York Mercantile Exchange on light volume. The gold price today has traded as high as $1,212.10 and as low as $1,201.40. The U.S. dollar index was rising 0.31% to $80.66 while the euro was falling 0.43% to $1.32 vs. the dollar. The spot gold price Monday was down more than $4, according to Kitco's gold index.

Gold prices reversed direction and headed lower Monday, but were still able to settle above the critical $1,200 level.

"The key for gold will be its ability to conquer the resistance band between $1214-18," says James Moore, analyst at thebulliondesk.com in his daily metals report. Gold's appeal as a safe haven asset was invigorated Friday after the U.S.'s weak unemployment report spooked investors. The Labor Department said 131,000 jobs were lost in July and only 71,000 private sector jobs were added, which fueled deflationary and recessionary fears.

Moore says, "players are likely to remain cautious ahead of the Fed statement [and] trade [will] remain thin and volatile due to summer holidays in the northern hemisphere."

Many experts think Friday's disappointing jobs number will put pressure on the Federal Reserve when it meets Tuesday to take steps to jump-start the U.S. economy, which is a mixed bag for gold.

Key interest rates are expected to stay between 0% and 0.25%, but the growing expectation is that the Fed could buy U.S. debt to pump more liquidity into the market. The Fed quit lending money to the U.S. government in March, and any move to restart the program could be seen as a sign of desperation and trigger a surge into gold, but it could also boost confidence in the markets, which would help stocks and hurt gold.

Although short term, gold will be caught in this tug-of-war, long term a Fed move could support prices. At the outset, analysts anticipate that the Fed will use current interest payments and maturing debt as the cash to buy U.S. bonds, but once that money depletes the fear is that the Fed will have to resort to its printing press. Although inflation is currently in check with core consumer prices rising only 0.2% in June, future money printing could lead another inflation panic into gold.

One of the biggest factors contributing to gold's 24% rise in 2009 was the worry that monetary easing and money-printing would lead to hyperinflation as the dollar lost purchasing power. In times of currency crises, gold prices typically see strong rallies as many investors view gold as a form of money that retains more value than flailing currencies.