Gold Prices Lose Steam as Dollar Gains Ground (Update 2)

NEW YORK (TheStreet ) -- Gold prices were choppy Wednesday as the U.S. dollar clawed higher.

Gold for February delivery was down $2.90 at $1,614.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,643.70 and as low as $1,607.70 an ounce while the spot price was down $1.40, according to Kitco's gold index.

Silver prices were down 21 cents at $29.32 an ounce while the U.S. dollar index was slightly higher at $79.85.

Gold prices lost steam as the U.S. dollar index traded around the $80 level, making gold more expensive to buy in other currencies. Gold had popped in Asia overnight and broke above its 200-day moving average around $1,620 an ounce, a key technical level, which gold broke below last week. Gold must close above that level to truly reassure traders and restore confidence in an up-trend. Confidence will no doubt be shaky as gold couldn't hold on to those gains.

As gold popped to $1,643 an ounce, buy stops were most likely activated around that 200-day moving average, a predetermined level that traders buy. Profit taking was then seen as gold hit that intra-day high as investors locked in gains. Continued profit taking into year's end, a wobbly euro and any kind of dollar strength could provide short-term headwinds for gold.

News hit Wednesday that European banks borrowed almost 500 billion euros from the European Central Bank to take advantage of the central bank's three year low interest loan.

Vote: Where will gold prices finish in 2011?

The hope is that European banks will use that money to buy sovereign debt rather than keep the cash in their coffers. If there is follow through, it means that the ECB is indirectly becoming the lender of last resort. The news first propped up the euro but then left many worried that perhaps banks borrowed too much money and that financial conditions are worse than expected.

"There seems to be so much talk about gold breaking the 200 day moving average," said Kobus Nell, analyst and assistant fund manager of growth investing at StanLib, "one must remember in many emerging currencies, the gold price has not shown the same trend of breaking the 200-day moving average."

Technically, a lot of damage was done. Michael Burke, TradeStation's vice president of institutional training, thinks gold is in a consolidation phase between $1,550 and $1,650 an ounce with $1,600 being the magic number. "If it stays between $1,550 and $1,600 that is not a good sign."

Burke sees gold in a mid-term downtrend and says its hard to see where buyers would come back in. "This is one of those opportunities where you let the market consolidate for a while and wait for direction." Burke says the longer gold consolidates the bigger the move will be whether up or down.

"News is overshadowing everything," he says. "It doesn't matter what the fundamentals are right now. [At the] end of the year there are not that many traders in place, so every little influence looks magnified."

Joe Wickwire, equity analyst, portfolio manager at Fidelity Investments, disagrees and thinks the fundamentals for gold are intact regardless of recent price action. "Gold started to move up in 2001 and it was due to macroeconomic imbalances and a geopolitical tensions and a very favorable supply and demand profile. ... Every so often you get a pullback in the gold price and then you settle out and some of the weak hands liquidate."

Wickwire points out that net long speculators have declined 40% since their August highs as of last Friday, which means that the majority of gold's 13% fall in September and 8% decline last week was primarily due to a shakeout of speculators rather than physical gold holders. "When the specs get shaken out they sell and that can put temporary price pressure on the gold price after selling is done ... Every time you have had something like this over the past 10 years ... it was more of a buying opportunity vs. a reason to capitulate."

David Williams, director at Strategic Gold Corp., which buys and holds physical gold for investors, thinks that gold is getting ready for a big surge which will take prices to $3,000 an ounce by June.

"I personally think we are on the way up again. There could be one more wave down on technicals but then it [will move] up very quickly." Williams thinks that the main catalyst will be inflation, that all the paper money that has been pumped into banks and held in their coffers will finally make its way into the system.

"The moves that we are experiencing right now on the way up has to do with gold being viewed as a store of wealth," he says. "As people realize that's a better place to go with it then it will pop up."

Gold mining stocks were choppy Wednesday. Kinross Gold(KGC) was down 1% at $11.74 while Yamana Gold(AUY) was climbing 0.88% at $62.61.

Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were trading mixed at $37.14 and $13.76, respectively.

--Written by Alix Steel in New York.

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