Gold Prices Settle Near $1,200

Investors were also digesting the news that China will expand its gold market. Individual investors and consumers are already big buyers of gold, accounting for 11% of global gold demand in 2009, but now the People's Bank of China is trying to expand gold trading.

The statement is not yet posted on the English version of the PBOC's website but the Chinese State Council issued a release stating that more commercial banks will be allowed to import and export gold and will be urged to issue "yuan-denominated gold derivatives."

Gold bugs had been worried that China would actually lose interest in gold after China's State Administration of Foreign Exchange, or SAFE, called the gold market illiquid and small.

"That is clearly not the case," said George Milling-Stanley, managing director, Government Affairs, World Gold Council, "with the government taking significant steps to improve access to gold for their citizens."

China's reserve bank currently holds 1,054 ounces of gold, about 1.5% of its total reserves. Whether or not the bank buys more gold for itself, the bank appears to be taking steps to promote gold ownership among its citizens.

A weaker dollar and stronger yuan, as China lets its currency rise in value, will also help boost gold demand in the country. A stronger yuan gives consumers more purchasing power as well as making gold, a dollar backed commodity, cheaper to buy. Don Dion, portfolio manager for ETF Action , said "demand for jewelry will rise with incomes and investors in the country want something to buy besides stocks and real estate."

Silver prices reversed directions and settled down 14 cents to $18.27 while copper closed up 4 at $3.40.

Gold mining stocks, an alternative way to invest in gold, were rallying. Kinross Gold(KGC) was up 1.17% to $15.63 while SPDR Gold Shares(GLD) was rising to $116.89. Other gold stocks New Gold(NGD) and Gold Fields(GFI) were trading at $5.16 and $14.12, respectively.

--Written by Alix Steel in New York.

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