By Debbie Carlson of Kitco News
Chicago — (Kitco News) –The dog days of summer have the gold market in its teeth, keeping prices in a stubborn range and not shaking loose of its prey.

Without a catalyst gold prices could very well hold in its roughly $100 range between $1,170 and $1,270 area. The first catalyst, however, could come in the form of selling, rather than notching a new high.

The events that have drawn investors to gold have lost their urgency: concerns about sovereign debt are beginning to subside; currencies like the euro are stabilizing; inflation is less of a worry. So far, nothing shocking has leaked so far from the stress tests the European Central Bank are conducting on banks there. Without fundamental news to entice buying, gold prices are drifting.

Gold’s meandering has caused the investment crowd to start to lose interest in owning the yellow metal at these levels. Without buying by investors, gold’s price could start to creep lower by default. And that seems to be what is happening right now.

“We’re starting to see some liquidation in the ETFs, pruning back some of their longs,” said Frank Lesh, futures analyst at FuturePath Trading.

In the futures market at the Comex division of the New York Mercantile Exchange, he said some traders are starting to sell rallies and are trying to play the market from the short side. He stressed the positions were “nothing definitive” but that some traders were putting on shorts simply because the market is drifting lower.

Sterling Smith, commodity trading adviser and market analyst at Country Hedging, said there’s been some selling of gold call options in the futures market above the market.

How the market acts in the coming days could signal whether the current floor can hold. The $1,170 area for the August futures is a big trendline, Lesh said. If that trendline is seriously broken, prices could crumble to $1,100. He said there are a lot of sell stops under the market that would be tripped if prices spiked down.

That could be a significant win for the bears, if it happened. He noted $1,100 is an important level because that’s where prices ended 2009. That means anyone who bought this year would be left with a losing position. Conceivably a break of $1,100 could bring gold to the $1,000 area.

Smith said he doubted the small speculators who have bought gold on this year’s rally would look to exit positions. “They’re a very stubborn lot; they like to hold gold through thick and thin,” he said.

He also added if prices sunk to the $1,120-30 area, it might entice some jewelry fabricators back into the market to get some coverage. Jewelry demand has been a casuality of this year’s investment-driven price rise.

In addition to possible technical pressure, Smith said if the stock markets were to fall sharply, that could pull gold with it. On heavy down days, gold has fallen in sympathy with equities. Poor economic news could also trigger a break, he said.

On the upside, strong economic data or something that might signal inflation could push prices back to their highs, he said. Otherwise, renewed problems in Europe, such as a flare up for Hungary as it tries to deal with its debt situation might eventually cause the euro to buckle. Hungary still uses its own currency, the forint, but problems there could spill over to the euro. He also said the rally in the euro might have run its course. There is some sense the gains in the euro came from ideas the common currency was oversold after its recent losses versus the dollar and due for a rebound. Short covering was likely a factor in its upswing.

Commerzbank sees the third quarter average price for gold at $1,150 and back to $1,250 by the end of 2010 and into the first quarter of 2011 and at $1,350 by end of 2011. The bank, in a Wednesday research noted, agreed the doldrums have struck gold now and expects this consolidative trend to last.

In the short-term prices could decay, but longer-term they remain bullish on gold. They said selling of gold scrap fell 43% in the first quarter of 2010. “As incomes rise, households are obviously less obliged or willing to sell gold in order to obtain liquidity,” the bank said.

Mining is likely to increase, but the activity will likely come from China and Russia, which probably will put that in storage in its own central banks. India could purchase its gold from the International Monetary Fund as it has done before.

“As is evident from India’s central bank’s gold purchases in the autumn of last year at record prices of $1,045 on average at that time, India will not be put off either by a high price level,” the bank said.

By Debbie Carlson, contributing to Kitco News;dcarlson@kitco.com