Gold Prices Pop After Fed Announcement

NEW YORK (TheStreet ) -- Gold prices lost steam Tuesday on the back of a stronger U.S. dollar but reversed directions in after-hours trading on the Comex after the Federal Reserve said it would continue to buy U.S. Treasuries.

Gold for December delivery settled $4.60 lower to $1,198 an ounce at the Comex division of the New York Mercantile Exchange. The price went as high as $1,204.10 and as low as $1,192.50 during the session. The U.S. dollar index was giving up most of its gains and was rising only 0.10% to $80.81, while the euro sank 0.12% to $1.32 vs. the dollar. The spot gold price Tuesday was up more than $4, according to Kitco's gold index.

Investors were jittery ahead of the Fed's announcement on interest rates and opted for cash over stocks and gold. But traders changed their tune and started to pile into the precious metal after the Fed said in its statement that it would reinvest principal payments from mortgage-backed securities into long-term U.S. Treasuries.

The Fed also held key interest rates at 0% to 0.25%, which was expected and downgraded its view of the U.S. economy, stating that the pace of economic recovery "is likely to be more modest" than previously anticipated. Gold prices were rallying $4.20 in after-hours trading on the Comex's December contract.

Gold prices are likely to benefit from these moves over the long term. The Fed stopped loaning money to the U.S. government back in March and will now re-institute that program. Many analysts fear this will lead to a bigger deficit, more money printing and a devalued dollar, which is a cocktail for higher gold prices.

"I think it's going to be very supportive for the gold market," Phil Streible, senior market strategist at Lind-Waldock. "I think you're going to see an upward push through that $1,218 to $1,220 range ... and that'll set up for the end of the year where we end up rallying up and making a new contract high."

Gold prices had settled above $1,200 for two trading sessions in a row prompting some profit-taking amid light volume and nervous trading. Streible thinks gold is "trapped in a range" for the short term.

Video: Gold Prices Will Waffle >>

Gold prices will look to the U.S. dollar for further direction as the dollar-backed commodity typically trades inversely to the currency.

Silver prices settled down 8 cents to $18.15 while copper closed 4 cents lower to $3.31.

Industrial metals sank on the news that China imported less goods in July than previously expected. Countries have been looking to China to lead a global economic recovery through its voracious demand for merchandise and commodities. Investors have been worried that China's recent steps to control spending and monitor inflation would hurt this demand.