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(Gold story updated to reflect precious metal settlements and share price changes of various gold stocks)



) --

Gold prices

settled lower Friday as investors digested China's

increase in its banks' reserve requirements


Gold for February delivery settled down $7.90 to $1,384.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Friday traded as high as $1,393 and as low as $1,372.70.


U.S. dollar index

was flat at $80.04 as was the euro at $1.32 vs. the dollar. The spot gold price fell by $1.10, according to Kitco's gold index.

Gold prices were having a mixed reaction to moves from China to cool rising inflation ahead of its core Consumer Price Index reading for November. China is set to release the data on Saturday and reports indicate it could be as high as 5.1% vs. a year ago. October's reading was 4.4%.

China raised the amount banks must hold in their reserves by 50 basis points effective Dec. 20. The move marks the sixth time this year China has taken this step, which effectively takes money out of circulation by forcing the banks to stash more.

Investors had been expecting a more aggressive interest rate increase. So on the one hand, gold prices were seeing a bit of relief at the more tame measures, but gains were tempered on worries that a reserve ratio increase won't be enough to severely tame inflation and that a rate hike is still in the cards possibly after the CPI reading.

China also reported a big trade surplus for November

with exports and imports popping 35% and 38%, respectively. Its growth will put even more pressure on the country to boost rates sooner rather than later.

China is the world's largest gold producer and the second largest consumer of gold importing 209.7 metric tons in the first 10 months of 2010, equivalent to 7.4 million ounces. Although China's central bank has said it stopped buying gold, the country is encouraging gold investments.

China is a big proponent of gold futures, bars and jewelry and the Chinese Securities Commission recently gave the green light to a gold mutual fund to give investors exposure to the international gold marketplace.

According to the World Gold Council, third-quarter jewelry demand in China rose 8% from a year earlier to 101.3 tons while demand for gold bars and coins popped to 45.1 tons, a new record.

The WGC comments that Chinese investors have "chosen to direct a proportion of their considerable savings to gold investment products ...

helped with gold bars being offered by a wider range of outlets including banks, bullion houses and even department stores."

The worry is that this trend will change if China raises interest rates. Higher rates might make it more appealing to keep money in the bank rather than in gold while at the same time increasing borrowing costs and damaging purchasing power.

Also, a rise in interest rates would damage inflation expectations and might force some traders who were buying gold as a hedge to rethink their positions.

Legendary investor Jim Rogers, who is invested in Chinese stocks and the yuan, says "my view

is if they just let the currency rise, it would help the inflation problem." Rogers is also very confident in the Chinese story even if growth slows.

"I've being going to China for 26 years ... and I assure you China is growing very rapidly and doing a lot of things right. Whether it's 8% or 12% ... I think that the 21st century will be the century of China."

While gold prices contend with China, they also must battle with profit- takers and "bargain hunters" leading to increased volatility as traders rebalance their gold holdings headed into the end of the year.

>> Video: #1 Precious Metal for 2011

William Adams, head of research for

, writes, "We are bullish medium-to long term ... there may have to be a lot more investment buying and financing deals to keep prices up." Adams sites European austerity measures and stricter fiscal policy in China as a trigger for a potential global slowdown.

Silver prices

fell 21 cents to $28.61 while copper was added 3 cents to $4.11.

Image placeholder title

Gold mining stocks

, a risky but profitable way to

buy gold

were trading mixed Friday.



was falling 0.4% to $46.03 while

Kinross Gold


was down 0.9% to $18.28.

Yamana Gold


was 0.4% lower to $12.36 and

AngloGold Ashanti


was up 0.8% to $48.76.

--Written by Alix Steel in New York.

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Alix Steel


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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.