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Gold Prices Claw Higher

Gold prices in New York struggled to regain momentum Tuesday as profit-taking weighed on the precious metal, tempering its upside.



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Gold prices

in New York struggled to regain momentum Tuesday as profit-taking weighed on the precious metal and tempered its upside.

Gold for August delivery settled 10 cents higher to $1,240.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,244 and as low as $1,233. The

U.S. dollar index

was dipping 0.02% to $85.96 while the

euro was falling

0.27% to $1.22 against the dollar. The spot gold price Tuesday was adding $7, according to Kitco's gold index.

Gold futures, or paper gold, and the spot price were diverged Tuesday as traders rebalanced their gold options ahead of the quarter's end this Friday and Thursday's options expiration, while investors continued to buy physical gold as a safe-haven asset.

Helping gold's safety bid was the news that

Fitch lowered its debt rating


BNP Paribas

, the European Union's biggest bank. The downgrade reminded investors that there is more headline risk to come from the eurozone and that the future of the euro is still uncertain. Physical gold is an appealing asset for investors looking for a safe place to put their money as gold always retains some form of its value.

Weak existing home sales data from the U.S. also spooked investors as the data highlighted the fear that the recovery in housing was due to the $8,000 new home buyer tax credit rather than fundamental improvements. The gold spot price received a boost as investors traded out of stocks for the precious metal.

On the flip side, traders were readjusting their future contracts and also taking profits where they could after Monday's late day selloff, which restricted upside for paper gold prices.

Gold prices will look toward the

Federal Reserve's two-day FOMC meeting

, culminating with its Wednesday rate decision. The Fed is expected to keep interest rates low for an "extended period of time," language that has remained consistent since the end of 2009. Low interest rates pump more money into circulation and raise the risk of future inflation, despite the fact that falling prices make deflation a more short-term risk. Investors turn to gold as paper currencies lose value, and low rates could give a boost to prices.

However, one problem the Fed will have to contend with is the need to pump more stimuli into the banking system to free up liquidity and help unemployment vs. curbing the U.S.'s $13 trillion deficit. Other global economies like Europe have been opting for austerity measures to reduce budget deficits, but the U.S. has been advocating more spending in the short term. Investors will be paying close attention to the language coming out of the Fed in terms of stimulus vs. fiscal restraint as well as growth prospects for the U.S., previously forecast at 3.2% to 3.7% for 2010.

Gold prices could benefit in either scenario. If there is more "free money," then gold makes an attractive investment as a hedge against "money-printing," but any monetary discipline could spook investors and prompt a panic rush into gold.

"I think what rising gold prices are telling us is that there is a lot of inflation in our future," said Peter Schiff, president of Euro Pacific Capital. "As the world stops lending us money, my fear is that rather than making the necessary cuts, the way Europe is trying to do now, instead of making those cuts, we try to avoid the pain by simply monetizing the deficits ... that the Federal Reserve buys more debt so that the government doesn't have to make the hard choices ... I think we're still going to several thousand per ounce

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gold and ultimately maybe a lot higher if we refuse to do the right thing."

Silver prices

settled up 9 cents to $18.90 while copper closed 5 cents higher to $2.99.

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Gold mining stocks, a more risky but more profitable way to

invest in gold

, were slightly higher.

Gold Fields

(GFI) - Get Report

was slipping 0.29% to $13.55 while

New Gold

(NGD) - Get Report

was rising 1.01% to $6.50. Other large gold miner


(IAG) - Get Report

was higher by 0.55% to $18.13 while the gold ETF

ETFS Gold Trust ETF

(SGOL) - Get Report

was slightly higher at $123.68.


Written by Alix Steel in New York


Alix joined TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.