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Gold Prices Settle Lower

Gold prices were free-falling Wednesday as investors sold gold after prices reached a record high.
Author:

NEW YORK (

TheStreet

) --

Gold prices

retreated quickly Wednesday as investors took advantage of gold's record high to take profits.

Gold for August delivery settled down $15.70 to $1,229.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high as $1,242.60 and as low as $1,223.10. The

U.S. dollar index

was slipping 0.55% to $87.91 while the

euro was rising 0.21%

to $1.199 against the dollar. The spot gold price Wednesday was down more than $3, according to Kitco's gold index. The divergence between spot gold and the futures market indicates that investors might be holding on to their physical metal but trading paper gold.

Gold prices have risen 2% since Monday

and managed to touch a new high of $1,254 an ounce. Investors took the opportunity Wednesday to raise cash in one of the few assets to yield a profit. The

Dow Jones Industrial Average

has taken a beating

falling 316 points since Friday

despite Tuesday's late-day rally.

In times of economic uncertainty, investors buy gold as a form of money that retains value. However, the need for cash to cover losses in the stock market and the desire by investors to take profits where they can, can trigger selling.

Europe Will Drive Gold Prices Higher

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"It's perfectly reasonable to see a pullback after a nice pop," says Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund. "But I really can't see how gold would fall materially lower. You may see a lot of gyrations ... but I think from a fundamental standpoint there are a lot of positive factors for gold to go higher." Hicks price target for gold prices is $1,300 in 2010 and $1,500 for 2011.

The recent pop in gold prices has many analysts wondering if the gold trade is too crowded. Large double-digit price moves typically signify big buyers coming into the gold market like hedge funds or central banks after which smaller investors follow suit for fear of missing the trade.

Mark O'Byrne, executive director of Goldcore, disagrees. Goldcore is an international bullion broker and O'Byrne says gold remains a fringe investment.

"Buy orders are coming from wealthy and high net worth clients (minimum order remains $10,000) so the increased buying is not from the man in the street or the average retail investor." Despite the absence of retail investors, Goldcore's May bullion sales almost tripled from a year ago, the company says.

Waiting in the wings as a

support for higher gold prices

is central bank buying. Emerging market countries like China and India have been buying gold since 2009 and have transitioned into net buyers from net sellers, according to the World Gold Council.

Iran's central bank is the latest to show interest in gold after announcing it would sell 45 billion euros for U.S. dollars and gold. Central banks typically do not announce when they will purchase gold for fear of moving the price higher but many analysts speculate that large double-digit price moves may indicate some type of large purchase.

Gold prices fell from retreat to free-fall as

Federal Reserve Chairman Ben Bernanke testified

to the House budget committee on the health of the economy. In a pre-released statement, Bernanke said "Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity. "

The statement renewed speculation that the Fed would raise key interest rates to monitor inflationary concerns which weighed on gold prices. Investors typically buy gold on inflation fears as "free money" devalues paper currency and makes gold a more attractive asset. If the Fed's raises rates and takes inflation off the table, many analysts expect the traders who were buying gold as a hedge against the government's printing presses to ditch the metal.

Silver prices

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were slipping 28 cents to $18.18 while copper prices were rebounding 7 cents to $2.85. Shares of

Freeport McMoRan Copper & Gold

(FCX) - Get Report

, which trade in tandem with copper, were reversing earlier gains and wa falling 0.34% to $61.27.

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Mining stocks, a more risky but more profitable way to

invest in gold

, were falling.

Barrick Gold

(ABX)

was down 1.57% to $42.66 while

Newmont Mining

(NEM) - Get Report

was slipping 1.86%to $55.40.

Kinross Gold

(KGC) - Get Report

and

Goldcorp

(GG)

were trading at $17.18 and $43.50, respectively. Shares of

AngloGold Ashanti

(AU) - Get Report

were slightly lower at $42.01.

Shares of the popular gold exchange-traded fund,

SPDR Gold Shares

(GLD) - Get Report

, were down 0.47% to $120.43 after adding 12.18 tons of gold Tuesday as investors piled into the ETF.

--

Written by Alix Steel in New York

.

Alix joined TheStreet.com 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.