) --

Gold prices

were popping Tuesday as spooked investors bought gold as a safety net against geopolitical unrest and a falling euro.

Gold for August delivery, the most actively traded contract, settled $11.90 higher to $1,226.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Tuesday has traded as high as $1,230.60 and as low as $1,211.60. The

U.S. dollar index

was rising 0.19% to $86.68 while the euro was sinking 0.60% to $1.22 against the dollar. The spot gold price Tuesday added $9, according to Kitco's gold index.

Gold prices settled up double digits after traders digested the news of Spain's debt downgrade by Fitch. The announcement that the ratings agency lowered its rating from AAA to AA, with a stable outlook, came on Friday as many traders were already on vacation for the long holiday weekend.

Investors traded out of stocks and some gold positions

in order to have cash on hand for the weekend. Now traders are putting the cash to work in gold as a safe-haven asset.

The euro fell to its lowest level

in more than four years on rumors that France's debt rating might also get whacked with a downgrade. Many experts are still anticipating euro parity with the dollar.

Also supporting higher gold prices was Israel's attack on the flotilla of aid relief ships, which broke a blockade to bring supplies to Gaza and left nine people dead. The ramp-up of violence in an already tumultuous region buoyed gold prices as gold retained its appeal as a hedge against a financial and military crisis.

Gold prices have settled above the critical $1,220 level and are now eyeing its old record high of $1,249 an ounce. Two factors waiting in the wings to drag on gold prices are an economic slowdown in China and weakening physical demand from India.

Why Gold Prices Will Hit $1,300

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Suresh Hundia, head of Bombay Bullion Association

, told


that India's gold imports fell 39% in May as prices hit new highs. India is typically very price sensitive and focused on silver and recycled gold during its strong gold-buying Hindu festival.

Investors are still concerned over an economic slowdown in China. China has been taking steps to control its ballooning real estate business as well as restricting the amount of money in circulation after reporting an 11.9% growth in the first-quarter. The government has raised the reserve requirement for banks three times in the last seven months and these steps coupled with slowing export demand from Europe due to the sovereign debt crisis could shrink China's economy more than expected.

Although over the long run, worries about a China slowdown could weigh on gold prices, some analysts think they could actually push prices to $1,300. "In the short run ... people want to get into something that's tangible," says Adam Klopfenstein, senior market strategist at Lind-Waldock. "If people are looking at asset classes that are vulnerable to a correction, the name of the game in the short run is getting into something they believe is a flight to quality mechanism like gold."

"I think after the first correction at $1,250 you'll see a few people back off ...

but you'll see it trade above $1,300

in 2010."

Silver prices

settled 12 cents to $18.55 while copper closed down 4 cents to $3.06.

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

TST Recommends

invest in gold

, were higher.

Barrick Gold


was rising 1.37% to $43.02 while

Newmont Mining

(NEM) - Get Report

was adding more than 2.5% to $55.24. Other large gold miners

AngloGold Ashanti

(AU) - Get Report




were trading at $41.87 and $43.45, respectively.

Shares of

Freeport McMoran Copper & Gold

(FCX) - Get Report

were trading more than 4% lower in tandem with copper prices while

Southern Copper

(SCCO) - Get Report

was losing almost 5% at $28.08.

Shares of the gold ETF,

SPDR Gold Trust

(GLD) - Get Report

were rising 0.83 to $119.76.


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.