Gold continues to climb, touches $1,280

By Alix Steel, TheStreet

Updated at 3:35 p.m. ET

Gold prices continued to climb toward $1,300 an ounce on inflation worries, rumors of a second round of quantitative easing from the Federal Reserve, and a lackluster global economy.

Gold for December delivery Friday settled $3.70 higher to $1,277.50 on the Comex division of the New York Mercantile Exchange. Gold today traded as high as $1,284.40, another record, and as low as $1,273. The U.S. dollar index was up 0.2% at $81.36, while the euro was down 0.2% to 1.30 vs. the dollar. The spot gold price was losing 40 cents, according to Kitco's gold index.

Gold prices were losing some momentum Friday as the U.S's weak inflation reading tempered inflation fears that have been bubbling up around the globe. The U.S. Consumer Price Index for August was unchanged from July, but this was in opposition to a higher-than-expected Producer Price Index reading on Thursday. The U.K. reported a higher inflation reading this week, and India's central bank is moving to take money out of circulation to fight inflation.

Today is also quadruple witching, in which options on stock index futures, stock options, stock index options and stock futures all expire, forcing traders to rebalance their portfolios. This leads to more volatility, especially in the gold market.

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But the real reasons gold is hitting new highs right now are hedge funds and the Federal Reserve. The Fed will meet Tuesday to discuss interest rates, and although no changes are expected, the rumor is that the Fed will run its printing presses and issue another round of monetary easing. A low inflation number in the U.S. also will give the Fed a green light to pump more money into the system.

Although there have been reports that the Fed will do no such thing because the governors can't come to a consensus, the conviction and gold's monster rally tell a different story.

The other factor moving gold prices is hedge fund buying. Strong double-digit gains like the market saw Tuesday always point to big purchases. Many experts say gold will inevitably hit $1,300, as "it seems very likely that the funds have decided that this is the next target," said Jon Nadler, a senior analyst at Kitco.com.

Of course, fund buying leaves room for fund selling. If funds are buying gold as protection against more quantitative easing, then what happens if the printing presses never run and the crisis premium comes out of the market? A $30 move up could result in a $30 selling frenzy.

Nadler also called a "time top" in gold, saying that in the next 12 months gold's 10-year bull run will come to an end when investment demand cools. "It's possible that this market . . . has anywhere from $50 to $100 worth of life left in it." This would put gold prices at $1,360 to $1,380 an ounce.

Despite technical readings, $1,300 gold is a sexy number that will no doubt catch the eye of more hedge funds and retail investors alike. Even though it's just a number and many gold bugs predict $2,500 to $5,000 gold in the future, $1,300 is an important psychological barrier.

At record-high prices, the tendency for investors is to chase the market because the reality is that most people don't own gold. "The reflexivity of the moment is for buying to beget buying," said Tony Crescenzi, a strategist and portfolio manager at Pimco.

Analysts typically recommend that an investor have 3% to 10% of his portfolio allocated to the precious metal, depending on risk tolerance, but that allocation is pretty rare. Even legendary investor George Soros, the seventh-largest shareholder of the gold exchange-traded fund SPDR Gold Shares (GLD), is only 2.6% diversified into gold, not counting gold mining stocks.

So when gold hits a record high and investors hear $1,300 an ounce, the temptation is to rush in to buy so as not to miss the boat. But slow down and be patient. You haven't missed anything -- yet.

Even the CEO of U.S. Gold Corp (UXG), Rob McEwen, urges caution for new gold investors. "There will be corrections because nothing goes in a straight line," he said in a recent interview with TheStreet. "It'll go up, it'll correct, it'll consolidate and then move higher."

McEwen believes that at some point there will be a mania in gold but that the market isn't even close. "It's an iterative process that takes people a long (time), and they finally go, 'I've got to have some.'" McEwen thinks investment buying is a third of the way there.

When buying reaches 100%, McEwen says to sell. "Gold is going to reach a point when its purchasing power relative to other assets is going be at its zenith, and that's when you want to start thinking about trading out and going into the debt market or equity market and diversifying out into other investments."

Silver prices were added 5 cents, hitting a 20-year high and settling at $20.82 per ounce. Copper prices closed up 3 cents to $3.52 per pound.

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were mostly lower after Thursday's gains. Barrick Gold (ABX) was rising 0.1% to $45.94 while Newmont Mining (NEM) was down 0.4% to $62.96. Randgold Resources (GOLD) was gaining 0.1% to $98.02, but AngloGold Ashanti (AU) was falling 3% to $43.50.

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