Modest Gold Buying Signals Mild Concern

Streible does think that if House Speaker John Boehner's debt plan is chosen -- in which the debt ceiling will be raised in two steps pending more spending cuts -- gold could rally on continued uncertainty. Gold's direction "depends on what deal gets passed," he says.

Other experts seem to think that higher gold prices are a done deal. James Moore, research analyst at FastMarkets, said that as the dollar's dominance as a safe haven continues to erode gold will pick up its slack. "Dips [should] be viewed as buying opportunities and the metal [will] look towards $1,650," Moore said.

In the latest commitment of traders report for the week ended Tuesday, July 19, traders increased their gold long positions by almost 15,000 contracts and decreased their shorts by 6,700 which signals a bet on higher gold prices.

Jon Nadler, senior analyst at Kitco.com, argued that although net shorts were reduced that they are still 35% higher than a year earlier. "Net longs are three-week-old pile-ons," meaning that long traders could dump gold and run at the first sign of lower prices.

George Gero, senior vice president at RBC Capital Markets, seconds that caution. "All these recent buyers are headline and momentum driven," which means if the market sees a positive solution to the debt issues and gold sells off these traders will be the first to go.

Nadler believes there are two camps in the gold community right now. The first says gold is going higher. This camp thinks that if the debt ceiling is raised, the government will have to pump more money into the system, devalue the dollar and support higher gold prices. If the U.S. defaults, then gold will pop as a safe haven. The high end of the range is between $1,650 and $1,750 an ounce.

The other camp, of which Nadler is a member, thinks that either way gold prices will head lower with the bottom of the range between $1,250 and $1,350.

"If you have real spending cuts," Nadler said, "can't you argue that the economy will contract and if the economy contracts what are you doing pumping metals higher?" If the U.S. defaults, Nadler argues that all assets will take a hit of 20%-40% at the least. "If prices fall below $1,480 then it is turning into a bear market."