Gold retreated from its 7-month highs as New York headed towards lunchtime today, putting the metal more than $5 lower at the PM Fix in London from the AM Fix four hours earlier.

As the heat came out of the gold market – putting the Dollar price down at a scary-looking $666 per ounce – action in the foreign exchange markets knocked gold lower still against the other major currencies.

Sterling pushed gold back to £340 an ounce, while the Euro price sank below €507 for the first time this week.

"Gold has moved too high, too quickly," reckons John Reade, head of metals at UBS. "To be blunt, the wrong types of investors own it."

Reade was referring to short-term speculators holding "long" positions via the Comex in New York.

Looking for a quick profit – rather than long-term protection against inflation and financial risk – they were always likely to quit the current rally in gold as soon as it tailed off.

Indeed, the surge of activity in currency trades since Ben Bernanke said US inflation is easing on Wednesday – coupled with the drop in gold prices today – suggests that professional traders may have switched their focus for the time being.

But "we remain positive on gold and forecast the metal will average $700/oz this year," says Reade, "based on a combination of gold market fundamentals – primarily due to a much improved buying from the physical market and the material chance of lower net central bank sales – and expectations of a weaker USD."

The weaker US Dollar, down below ¥119.50 today, has also pulled back the Yen price of gold.

Speculative traders at the Tocom closed their "long" positions this morning according to a report from Mitsui, the global bullion dealership.

"Now the questions is, do we continue the rally or take a break?" asks Mitsui's daily report. "Gold managed to take out resting orders at the $670 level [on Weds]. However, there should still be a significant amount of resistance up to $675, which was the high of the last rally back in July...

"Once $675 is taken out, the market should quickly move to test $700."

Chart-watching analysts at Barclays Capital in London also think resistance is likely around current levels.

"Into here we expect the market to struggle short term," they said in a note today.

"But bigger picture, we remain steadfast bulls."

Note that all forecasts are in US Dollar, as ever. Yet gold is about much more than just the "Imperial Greenback".

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