NEW YORK ( TheStreet) -- Gold prices fell again Wednesday after a dramatic 4% sell-off in the prior session as traders debated the metal's near-term prospects.

Gold for February delivery settled down $5.10 to $1,373.17 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,385.20 and as low as $1,364 during Wednesday's session.

The U.S. dollar index was rising 1.07% to $80.28 while the euro was retreating 1.12% to $1.31 vs. the dollar. The spot gold price was losing $8.20, according to Kitco's gold index.

Gold prices had a painful day on Tuesday and the weakness continued Wednesday. In total, the yellow metal shed almost $50 as profit-takers and sell-stops deepened the sell-off.

The trading has been driven by a stronger dollar and better-than-expected economic data moving investors away from commodities and into stocks as well as money managers and hedge funds locking in 2010 gains.

As gold prices traded below the 50-day moving average of $1,377, sell-stops were activated, a move in which positions are sold to help traders lock in profits. Jeb Handwerger, editor fo, says that the sell-off will "reach a frenzy as the 50-day is broken." Handwerger is looking for reentry all the way down at $1,250.

The pullback, however, didn't scare other ardent long-term gold traders away; it just raised the question of how and when to buy the precious metal.

Scott Redler, chief strategic officer at, has been trading gold through the SPDR Gold Shares ( GLD) fund since 2008 and is trimming his position while he figures out the next technical move.

"Gold is breaking the recent accelerated uptrend," says Redler. "I would recommend you getting down to tier one at best, if any. We need to figure out the composure moving forward."

Redler is still a believer in higher gold prices for 2011 but is not sure at what level. Gold's next support is in the $1,320 area and then the 200-day moving average of $1,265 an ounce.

Doug Kass, a contributor at, thinks gold could be one of the worst-performing assets of the year despite the fact that prices popped 400% in the last decade.

Big corrections in gold prices, however, are nothing new. There was one in early 2010 when spot gold prices sank almost $100 from their high in January to their low in February.

Pratik Sharma, managing director at Atyant Capital, says the sector "inhales and exhales 20%-30% at least once or twice a year."

Extreme selling has typically been met with stronger buying which has helped stanch gold's freefall. The gold ETF, the GLD, shed only 4 tons on Tuesday, indicating that there are still long holders in the market. But the momentum money will most likely stay on the sidelines in the short term to make sure the correction has completely shaken out.

As the spot gold price is showing, strong physical buying has not yet materialized.

On the fundamental front, recent inflationary indicators might prove helpful for gold. On top of the Eurozone's larger-than-expected 2.2% inflation reading for December, the Financial Times reported that food costs in the United Kingdom rose 5.5% in the past year, well above their high but tolerable 3.3% inflation rate. The Eurozone also reported November's producer price index reading of 4.5%, slightly higher than anticipated, as energy costs rose.

The mounting inflation news is putting governments in a bind. With economic growth still anemic, raising interest rates to fight inflation might not be a practical solution. In fact, countries like the U.K. have actually hinted at more quantitative easing and trouble hasn't shaken out for European Union nations either.

Portugal raised €500 million in short-term loans, but had to pay up for the money. The average yield jumped to 3.83% vs. 2.04%. Higher yields indicate that investors are reluctant to lend money to the country and must be enticed by higher interest rates. Another eurozone debt crisis eruption would only be good for gold as traders seek the metal as a safe haven.

Gold prices will also have to factor in a decision from China to let its currency, the yuan, rise 5% vs. the dollar in 2011. Logic dictates that a stronger yuan would mean a weaker dollar which would be good for gold prices as the two move inversely to each other. A stronger yuan could also increase China's purchasing power giving its citizens more juice to buy gold.

Jon Nadler, senior analyst at, argues that a beefed up Chinese currency will probably be neutral for gold. One possible scenario is that "upward revaluation means a tougher time for local exporters, which could imply less money available among the wealthy to spend on gold ."

Short-term gold prices were taking their direction from a better-than-expected Automatic Data Processing employment report which said that the private sector added 297,000 jobs in December -- more than double what was anticipated. Expectations are high headed into Friday's jobs number with analysts looking for 175,000 non-farm private jobs to be added, according to

Better data is hurting gold as investors see less need for the safe-haven asset.

George Gero, senior vice president at RBC Capital Markets, believes this selling might be over soon."Open interest in gold climbed to 592,000 as hedgers entered for the re-balancing week of portfolios." Gero is looking for stabilization if prices hold their current level through Thursday which will give gold a chance to return to basics.

Silver prices lost 31 cents to $29.19. If gold was suffering from dollar strength, silver was getting clobbered even more. The "cheaper" metal has shed 5.6% in the New Year. Copper ended 3 cents higher at $4.40.

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Gold mining stocks, a risky but potentially lucrative way to buy gold, were also unable to stem losses. Kinross Gold ( KGC) was 1.81% lower at $17.86 while Freeport McMoRan Copper & Gold ( FCX) fell 0.67% to $117.96. Other gold stocks New Gold ( NGD) and Gold Fields ( GFI) were trading at $9.31 and $17.31, respectively.

-- Written by Alix Steel in New York.

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