NEW YORK ( TheStreet ) -- Gold prices were tentatively lower Wednesday as investors piled into stocks as better-than-expected manufacturing data offset a disappointing jobs numbers.

Gold for December delivery settled $2.20 lower at $1,248.10 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high as $1,256.60 and as low as $1,244.10. The U.S. dollar index was slipping 0.89% to $82.46 while the euro popped 0.91% to $1.27 vs. the dollar. The spot gold price Wednesday was down $2.90, according to Kitco's gold index.

Gold prices were taking a breather after surging double digits Tuesday. At first Wednesday, gold was rallying more than $5 after payroll processor Automatic Data Processing said private sector payrolls fell 10,000 in August. But a slew of encouraging growth news from Australia, China, and the U.S. had investors piling into stocks.

The Institute for Supply Management's manufacturing index rose to a surprising 56.3, which signaled positive growth. The news came after China reported that factory activity grew for the first time in four months. But investors still appear cautious as they dump large gold positions ahead of Friday's critical jobs number.

The popular gold exchange-traded fund, SPDR Gold Shares ( GLD), added almost four tons Tuesday and now holds 1,302.5 tons. Shares were trading at $121.65.

"The price could go up further and possibly even to $1,260 ... going into the Labor Day weekend," says Jeffrey Christian, managing director of the CPM Group. "We're sort of comparing this to some extent to August of 2007 when gold didn't really take an August pause." In August the gold price surged 5% compared to 2008 and 2009 when the price fell 8% and 0.4%, respectively.

Christian does see higher prices for the rest of 2010 but doesn't think it will be a straight move up. "We think it will come off a bit in early September, but we think it will go to $1,300 and maybe even higher in late September, early October."

So with gold trading around $1,250 and perhaps making a run for its record intra-day high of $1,264 an ounce, should you buy gold?

Most gold experts would say investors should always have 3%-10% of a portfolio in gold as protection ranging from gold stocks to futures to ETFs to bullion. In order to reach that allocation, most experts would say to buy gold on dips. But the truth of the matter is, despite the fact that it's sexy headline news, the gold market is still very small and a lot of investors still don't own it.

A common mistake investors tend to make is chasing the gold price. When prices rise double digits and the media talks about $1,300 gold, investors panic and rush in to buy the metal for fear of missing the boat. The same is true in the reverse. If gold falls double digits, many investors dump their positions because they don't want to be left owning "cheap" gold.

Despite gold's almost 10-year bull run it doesn't mean there aren't corrections along the way, which create attractive buying opportunities. According to Kitco's spot gold chart for 2010, the price hit an average low in February of $1,058 an ounce and an average high in June of $1,261 leaving investors a $200 trading range to buy.

But before you pull the trigger, there are three factors to keep in mind: profit-taking, the dollar and India.

With gold one of the few assets recently to yield a positive return, investors might be forced to sell gold for cash to cover losses in equities. This pressure might be especially heavy as traders return from summer vacations next week.

Gold also typically moves in inverse correlation to the U.S. dollar. This trend can be bucked during times of real economic panic as both assets can be seen as "safer" places for an investor to park his money. But historically a strong dollar makes the dollar-backed commodity more expensive to buy in other currencies. The U.S. dollar Wednesday was trading lower as investors opted for stocks over safety. This trend could be short-lived, however, if the Labor Department delivers a weak jobs number Friday and investors seek the safe-haven asset again.

Finally, investors need to pay attention to demand from India. Gold jewelry demand accounts for 60% of total gold demand. According to the World Gold Council's most recent report on Gold Demand Trends, India bought 123 tons of gold jewelry in the second quarter, down 2% from a year earlier.

India is the largest buyer of gold in the world, but the market is extremely price sensitive. Jon Nadler, senior analyst at Kitco.com, says that gold dealers in India tell him "that customer orders are clustered at or $1,180 and below, and that preference among locals seems to be at or around those levels."

With prices now around $1,250, will consumers buy? Historically, as the price moves higher, so does India's tolerance for paying up for gold but it usually takes a few months for a new range to settle in and for buying to re-emerge.

The problem is that markets are looking for India to buy gold right now. India is preparing for a host of festivals such as Ramadan, post-monsoon wedding season and Diwali, which usually trigger large amounts of gold jewelry buying.

The absence of substantial demand could hurt gold prices even as investment demand stays strong.

" Scrap gold ... was making its way onto India's shopkeepers' shelves," says Nadler. "Physical buyers in India ... turned away from buying the precious metal for the moment, as the perception that gold prices are too high and that they might correct soon dented festival-related shopping enthusiasm."

In other gold news, the Wall Street Journal reported that JPMorgan ( JPM) will close its commodity proprietary trading desk to meet with the recent financial reform law. Its prop desk is in London and its dismantling might force liquidations in the gold futures market.

Silver prices were settled down 3 cents at $19.39 while copper closed up 10 cents to $3.47. Base metals were rallying Wednesday on the news the China's manufacturing rose in August to 51.7 with any number over 50 indicating activity.

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Gold mining stocks, a risky but potentially profitable way to buy gold, were mixed Wednesday. AngloGold Ashanti ( AU) was up 0.28% to $42.17 while Kinross Gold ( KGC) popped 2.25% to $16.54. Other gold stocks New Gold ( NGD) and Gold Fields ( GFI) were trading at $6.25 and $14.18, respectively.

-- Written by Alix Steel in New York.

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