Gold Prices Volatile, Settle Higher

NEW YORK (TheStreet ) -- Gold prices were volatile Wednesday as investors digested the Federal Reserve's downgrade of the U.S. economy and its decision to buy U.S. bonds.

Gold for December delivery settled up $1.20 to $1,199.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price ranged as high as $1,210.20 and as low as $1,194.20 during the session. The U.S. dollar index was rebounding 1.80% to $82.34 while the euro was sinking 2.39% to $1.28 vs. the dollar. The spot gold price sank $4, according to Kitco's gold index.

Gold prices seesawed during Wednesday's session. First, investors bid up the metal as a safety net against risky stocks and a struggling U.S. economy, but then were forced to sell gold for cash as the Dow Jones Industrial Average fell triple digits.

Gold at the Comex managed to eek out a small gain for the day as bargain hunters entered the market while physical gold prices were still struggling.

Any gains in gold were tempered by a huge U.S. dollar rally. The dollar had initially sold off on the news that the Federal Reserve would start buying U.S. debt, but technical trading and global growth fears boosted the currency.

In its most recent FOMC meeting, the Fed left key interest rates at 0% to 0.25%, which was expected, but it downgraded the economy, saying "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

The most significant part of the statement, however, was the news that the Fed would use money made from mortgage-backed securities to buy long-term Treasuries. The size of the Fed's balance sheet will stay the same, so no extra money printing for now, but it does open the door for more quantitative easing in the future.

Although investors rushed into gold as inflation fears spiked, many analysts expect fearful investors to stay trapped between their need for cash and their desire for the safe haven.

Short term, another popular safe haven is U.S. Treasuries. The yield on the 10-year bond sank to a 16-month low of 2.70% as investors lent money more readily to the U.S. But if the U.S. dollar corrects, gold will become more appealing as the metal will become cheaper to buy in other currencies, and as investors look to the metal as money that retains more value over paper currencies.

Most analysts expect trading volume to stay thin. The gold ETF SPDR Gold Shares(GLD) has held 1,282 tons consistently since Aug. 5 as investors passively hold gold.

"I think we'll generally hang around the $1,200 level for a bit and then we'll advance higher .... in the fall," said Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund.