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Gold Prices Lose Steam as S&P Downgrades France (Update 2)

NEW YORK ( TheStreet ) -- Gold prices cooled off Friday as stronger U.S. dollar hampered buying after Standard & Poor's downgraded France's triple A credit rating.

Gold for February delivery closed down $16.90 to $1,630.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,650.70 and as low as $1,625.70, while the spot gold price was down $11, according to Kitco's gold index.

Silver prices ended down 60 cents at $29.52 an ounce. The U.S. dollar index was up 0.82% at $81.48.

Gold prices got slammed Friday after news broke that Standard & Poor's had downgraded France's triple A credit rating. Markets had been anticipating this kind of news, but the euro and gold tumbled nonetheless.

Gold started off Friday on a low note after a mixed bond auction in Italy. The struggling eurozone country raised 3 billion euros for three years at an average yield of 4.83% down 14% from its auction last month. The auction was met with skepticism, however, as demand was lackluster, with a bid-to-cover ratio of 1.2. Anything under 2 indicates a weak showing.



In after market trading, gold recouped some its losses. George Gero, senior vice president of RBC Capital Markets, says the more mad news mounts the more central banks will increase money printing, which will increase gold's appeal as a safe haven.

Over the short term, however, gold continues to have a hard time decoupling from its positive correlation to the euro. "The fact that it is conducting these tandems moves with the euro still leaves us wary as to where this European situation is headed," says Jon Nadler, senior analyst at Kitco.com. "I don't think that the euro travails are nowhere near over."

Nadler thinks there is still a chance of a "disorderly implosion" in Greece as the country could default in March without its second bailout. Greece is having a hard time convincing private bond holders to take a big loss, a requirement for securing more money from the International Monetary Fund and the eurozone. "That would not benefit the euro, and in that case we could see asset sell-offs and a further run to the dollar for safe haven purposes."

Nadler says that there could be an upside correction to $1,700 an ounce in gold and $32 in silver before he sees the downtrend resuming.

Malcom Gissen, co-manager of the Encompass Fund, still thinks that gold will be viewed as a safe haven. "Until governments use gold as a basis for their currencies we are going to have higher gold prices ... if you are investing in gold you have to look at the long term and that means 3-5 years."

Adrian Ash, head of research for the BullionVault.com, agrees. "The fourth quarter of 2011 has shaken out a lot of hot money that came in over the summer but longer term, people who are buying gold don't look for a short term return." Ash believes that there are risks for higher gold prices in 2012, like slowing demand from China, questions over a return of Indian demand and a worsening sovereign debt crisis.

Ash is expecting volatility for gold but a slow progression higher. The volatility might scare investors from betting big on gold but that those investors worried about inflation will be buying. "With gold you own physical property," says Ash, "you are not a creditor anymore with gold." This anchoring will be very appealing to investors looking to protect against uncertainty over paper money.

Gold investors are still trying to find out if China will change its monetary policy after its December inflation reading came in at 4.1%, lower than the previous month at 4.2% but perhaps not low enough to aggressively pump more money into the system.

Credit Suisse calls inflation in China "sticky," fueled by high food prices -- up 9.1% year-on-year -- wages and too much money in the economy. "This also goes against the call of a quick and large-scale monetary easing."

Goldman Sachs, on the other hand, argues that China has already been easing monetary policy. "China's commercial banks extended 640 billion yuan in net new lending in December." M2 growth, or the amount of money in circulation plus savings accounts and deposits, was up 13.6% in December compared with a year ago. "We forecast new net lending of 9 trillion yuan this year, a growth rate of 16%." The easing might not come in the form of a rate cut, but the extra cash is in the economy.

HSBC also says that slowing inflation creates "ample room" to ease monetary policy and beef up growth. "This could stimulate already strong domestic demand for gold," wrote James Steel, analyst at HSBC, in a recent note. China has already imported 389 tons of gold in the first 11 months of 2011.

Gold mining stocks were falling Friday. Kinross Gold (KGC)was sinking 1.56% at $12.65 while Yamana Gold (AUY) was down 1.08% at $15.63. Other gold stocks, Agnico-Eagle (AEM) and Eldorado Gold (EGO)were trading lower at $36.97 and $14, respectively.



-- Written by Alix Steel in New York.



>To contact the writer of this article, click here: Alix Steel.

>To follow the writer on Twitter, go to http://twitter.com/adsteel.

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