Gold Prices Pause as Buying Cools

NEW YORK (TheStreet) -- Gold prices meandered lower Wednesday with trading cooling off after the metal set new record highs in the previous session.

Gold for December delivery settled down $3 to $1,268.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,273.50 and as low as $1,264.50 during Wednesday's session.

The U.S. dollar index was adding 0.25% to $81.43 while the euro was flat at $1.30 vs. the dollar. The spot gold price Wednesday was relatively flat, according to Kitco's gold index, as investors favored the physical metal over the futures market.

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Investors were taking a break in buying gold after the metal's amazing rally Tuesday when prices surged 2%. The metal was boosted by safe-haven demand and a weak U.S. dollar which plummeted on speculation that the Federal Reserve would announce more bond purchases at its meeting next week.

The bond buying would in essence signal QE2, or quantitative easing round two, supported by the printing presses as the Fed tries to pump more money into the economy. That speculation was waning Wednesday, however, as rumors of differing opinions at the Fed seemed to make a dramatic move like QE2 unlikely in the short term.

Alan Greenspan, former head of the Federal Reserve, said Wednesday at the Council on Foreign Relations that high gold prices point to a problem in currencies. If investors are fearful of weak paper money, they typically buy gold as a more stable form of currency. Greenspan called gold the "canary in the coal mine" to watch out for meaning that high gold prices could be indicative of problems elsewhere.

Greenspan wasn't the only big name weighing in on gold Wednesday. Investor George Soros said at a Reuters event in New York that gold is the "ultimate bubble." Soros said prices may keep rising but that the rally wouldn't last forever.

Ironically, Soros is the seventh largest shareholder in the popular gold exchange-traded fund, SPDR Gold Shares (GLD), with 5.24 million shares according to the most recent 13F filing for the second quarter. Soros Fund Management did unload 341,250 shares and its stake pales in comparison to Paulson & Co., which has 31.5 million shares, but Soros' bet is still significant.

Soros is also no stranger to gold stocks, he owns 13 including positions inMarket Vectors Gold Miners (GDX), a basket of large-cap miners, and Market Vectors Junior Gold Miners (GDXJ), a combination of small miners. His biggest adjustment was in selling 5.8 million shares of the speculative explorer, NovaGold (NG).

"He is right to warn," says Jon Nadler, senior analyst at Kitco.com. "He's not saying where the record is, [however]." Nadler believes that Soros would never actually sell out of all of his gold positions because he has been on the gold boat for years. He is just wary of investors who have never owned gold up to this point and are now vocal advocates.

"Ultimately he ... is treating gold properly. He is not looking at it for price appreciation ... if it was ... it probably prompted him to unload some...[he is treating it as] long-term insurance."

The hope for bullish gold bugs now is that since the $1,266 resistance level was broken on strong volume that $1,300 would be in sight. But many analysts doubt the sustainability of the rally.

"If we see the economic recovery strengthening ... there's going to be a shift from the actual gold as a safe haven towards more riskier assets ... that's going to push gold down quite significantly," says Toon van Beeck, senior industry analyst at IBISWorld.

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The U.S. dollar was staging a mini-comeback Wednesday after the Japanese government intervened in the currency market for the first time in six years. Efforts to force the yen to lose value to help Japan's exporters and fledgling economic recovery was helping the dollar and hampering gold's rally.

Typically, gold is inversely correlated to the U.S. dollar, although both can be bought as safe havens in times of real panic. But with the possibility of QE2, the dollar might have lost its safety appeal.

"The dollar ... is looking vulnerable technically," says Mark O'Byrne, executive director of GoldCore. "Continuing dollar weakness is likely as the Obama administration is forecasting this year's deficit will hit a record $1.47 trillion and $1.41 trillion next year."

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