Gold Prices Volatile, Settle Higher

Gold prices were volatile Wednesday as investors were torn between their need for cash and dependence on gold as a safe haven.
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NEW YORK (

TheStreet ) --

Gold prices

were volatile Wednesday as investors digested the

Federal Reserve's

downgrade of the U.S. economy and its decision to buy U.S. bonds.

Gold for December delivery settled up $1.20 to $1,199.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price ranged as high as $1,210.20 and as low as $1,194.20 during the session. The

U.S. dollar index

was rebounding 1.80% to $82.34 while the euro was sinking 2.39% to $1.28 vs. the dollar. The spot gold price sank $4, according to Kitco's gold index.

Gold prices seesawed during Wednesday's session. First, investors bid up the metal as a safety net against risky stocks and a struggling U.S. economy, but then were forced to sell gold for cash as the

Dow Jones Industrial Average

fell triple digits.

Gold at the Comex managed to eek out a small gain for the day as bargain hunters entered the market while physical gold prices were still struggling.

Any gains in gold were tempered by a huge U.S. dollar rally. The dollar had initially sold off on the news that the Federal Reserve would start buying U.S. debt, but technical trading and global growth fears boosted the currency.

In its most recent

FOMC meeting

, the Fed left key interest rates at 0% to 0.25%, which was expected, but it downgraded the economy, saying "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

The most significant part of the statement, however, was the news that the Fed would use money made from mortgage-backed securities to buy long-term Treasuries. The size of the Fed's balance sheet will stay the same, so no extra money printing for now, but it does open the door for more quantitative easing in the future.

Although investors rushed into gold as inflation fears spiked, many analysts expect fearful investors to stay trapped between their need for cash and their desire for the safe haven.

Short term, another popular safe haven is U.S. Treasuries. The yield on the 10-year bond sank to a 16-month low of 2.70% as investors lent money more readily to the U.S. But if the U.S. dollar corrects, gold will become more appealing as the metal will become cheaper to buy in other currencies, and as investors look to the metal as money that retains more value over paper currencies.

Most analysts expect trading volume to stay thin. The gold ETF

SPDR Gold Shares

(GLD) - Get Report

has held 1,282 tons consistently since Aug. 5 as investors passively hold gold.

"I think we'll generally hang around the $1,200 level for a bit and then we'll advance higher .... in the fall," said Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund.

Gold will be looking for growing jewelry demand from China and India, as festivals seasons in these countries begin, for prices to retest their $1,264 intraday high. "We are hearing that physical gold demand is picking up

in India, obviously that will put the wind at our back with respect to the gold price."

Silver prices

settled down 25 cents to $17.90 while copper closed lower by 5 cents to $3.25. Investors continued to worry about import demand from China and stagnating growth in the country, which was underscored by China's disappointing producer price index report for July.

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Gold mining stocks, an alternative way to

invest in gold

, were struggling.

Yamana Gold

(AUY) - Get Report

was down 2.95% to $9.56 while

Freeport McMoRan Copper & Gold

(FCX) - Get Report

was losing 4.44% to $69.96. Other large gold stocks

Agnico-Eagle

(AEM) - Get Report

and

Eldorado Gold

(EGO) - Get Report

fell to $60.01 and $17.12, respectively.

--

Written by Alix Steel in New York.

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