In a recent note, investment bank Goldman Sachs predicted rising inflation in China will trigger more aggressive hikes which will curb free money and therefore growth.

"We continue to expect one more 25-bp hike in both deposit and interest rates in the next two months," says the note, which would take the rate to 3.5%, close to its peak level.

Gold has been relying on strong demand from China, as well as India, for higher prices. The World Gold Council says that gold demand in China has increased on average 14% per year since 2001 during which time gold prices have risen 470%.

So far prices have rallied despite rate hikes in China, up 8.8% for the year, but Standard & Poor's sees more downside on dollar strength. Mark Arbeter, chief technical strategist at S&P, said the dollar index has bottomed and that it could rally up to the $80-$82 level, which would put pressure on gold and silver.

"While we think gold has an outside chance to make new highs, we believe prices could fall to the $1,250 - $1,300 region ... Silver is in much worse shape," wrote Arbeter in a recent note. "We think silver could fall all the way to the $20 an ounce are."

Gold mining stocks were mixed. Barrick Gold ( ABX) was up 1.22% at $46.39 while Newmont Mining ( NEM) was down 1.21% to $54.09. Other gold stocks, Goldcorp ( GG) and AngloGold Ashanti ( AU) were trading at $49.60 and $44.63, respectively.


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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

>To follow the writer on Twitter, go to http://twitter.com/adsteel.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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