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Gold and Silver Prices Take a Breather

NEW YORK ( TheStreet) -- Gold prices churned slightly higher Monday as profit takers and buyers battled it out following the yellow metal's record-breaking 2010.

Gold for February delivery added $1.50 to $1,422.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,424.40 and as low as $1,414.50 during Monday's session.

The U.S. dollar index was adding 0.06% to $79.01, while the euro added 0.05% to $1.33 vs. the dollar. The spot gold price was down 70 cents, according to Kitco's gold index.

Gold prices popped almost 27% in 2010, and after reaching a record settle on the last trading day of the year of $1,421.40 an ounce, investors seemed to be catching their breath. Volume still has yet to pick up as traders are trickling back from the New Year holiday, but the reality of a gold bubble popping has yet to materialize. Mild profit-taking Monday was met with buying and the upward trend for metal prices appears intact.

Silver prices surged 80% in 2010 as investors piled into the metal sometimes referred to as the "poor man's gold." Silver benefits from safe haven demand as well as improving industrial demand as the metal is used in a variety of "stuff" from iPads to solar panels to cars. Silver prices, which are more volatile than gold, saw a slight dip lower.

Investment demand is still the dominant driver for higher metal prices. The popular gold ETF, SPDR Gold Shares (GLD), added 168.8 tons for the year while the silver ETF iShares Silver Trust (SLV) added 1428.6 tons.

"The key word to look forward to in the coming year is investment," says Jon Nadler, senior analyst at Kitco.com. "Here is one component of demand which has many a factor coming into it that could alter it radically and rather fast."

The biggest threat for a shift in gold investment demand is the worry that central banks will raise interest rates. Gold typically does well in times of negative real interest rates, the interest rate minus the inflation rate.

China, for example, bought 146.4 tons of gold in the third quarter and currently has a negative real interest rate of 2.35%, despite its recent rate hike. Although the consensus is that the country will be forced to raise rates again, it would take significant increases to tame inflation and curb negative real interest rates. The most recent rate hike was only 25 basis points.

China reported Monday that manufacturing activity fell to 53.9 in December from 55.2 in November. Input prices for raw materials and supplies also fell to 66.7. Any reading over 50 indicates expansion, but the slower reading might take some pressure off China to keep raising rates.

In the short term, profit-taking will continue to battle with those money managers who sold gold at the end of 2010 and who will now buy back some of those positions. Gold prices still have yet to conquer their old intraday high of $1,432.50 an ounce.

Traders might also ignore gold and buy stocks instead. The 2011 mood is optimistic after the Dow's 11% pop in 2010 and better-than-expected construction spending and manufacturing data. The Dow was rising by triple digits Monday. Investors are no doubt looking ahead to Friday's U.S. unemployment report where expectations are high. The private sector is expected to add 140,000 jobs in December compared with a measly 39,000 jobs in November.

Better risk appetite could hurt gold as investors opt for stocks, but any uncertainty or another explosion of sovereign debt fears might trigger a flight to safety. Lou Grasso of Millenium Futures says that although gold prices could see a slight pullback in January or February, they will spike between $1,500 and $1,800 in 2011.

"The reason we have had the run has everything to do with the economies of the world," says Grasso. "I don't see an end to that ... so if we get an 8-10% pullback it would be a good time to get in."

Silver prices added 18 cents to $31.12, after hitting another record high of $31.27, while copper was up 1 cent at $4.45.

Most Recent Quotes from www.kitco.com

Gold mining stocks, a risky but potentially profitable way to buy gold, were mixed. Goldcorp (GG - Get Report) was 0.91% lower at $45.56 while Freeport McMoran Copper & Gold (KGC) added 1.81% at $122.26. Other gold stocks Gold Fields (GFI - Get Report) and New Gold (NGD - Get Report) were trading at $18.28 and $9.73, respectively.

-- 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.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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