Gold, Silver Prices Higher on Weak Dollar

Nadler believes that Greece or Portugal might be forced to sell some of its gold reserves, despite the fact the countries didn't do so last year when the debt crisis first exploded. "They might have to," says Nadler, " at least a portion might be pledged or perhaps mobilized in other ways because at the end of the day this is the reason why you keep gold in the basement."

Longer term, it's demand from China that could make or break gold prices.

According to the World Gold Council, Chinese gold demand could double under ten years. China consumed 233.8 tons of gold bars, coins and jewelry in the first quarter but worries had been cropping up that growth could slow. Goldman Sachs predicted that growth would moderate in China in 2011 to 9.4% and in 2012 to 9.2% due to aggressive interest rate hikes needed to fight inflation. Goldman wrote that April's weak manufacturing data was a demand issue as people and corporations spent less as it is more expensive to borrow now in China and as banks have to keep more money locked up.

Extra income in China is one of the reasons why gold demand is so strong. If that slows and rates keep rising, so will the ability and desire to buy gold.

Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund, says this is just a "bump in the road ... you can slow down the growth a little bit and you can play with the inflation numbers but ultimately speaking the modernization is going to drive demand and the supply demand shift isn't going to change"

Vote: Where will gold prices finish in 2011?

Initial estimates are that Chinese gold imports could pop more than 400 tons in 2011, according to GFMS, a precious metals consultancy, and that's not counting all the gold produced in the country. China is currently the largest producer of gold in the world. According to Reuters, China National Gold, the largest state owned gold producer, said that gold demand would jump 22% in the next three years and would keep outpacing internal production.

Gold mining stocks were rallying. Barrick Gold (ABX) was up 0.95% at $47.62 while Newmont Mining (NEM) was adding 1% to $56.41. Other gold stocks, Goldcorp (GG) and AngloGold Ashanti (AU) were trading at $50.18 and $45.22, respectively.

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--Written by Alix Steel in New York.



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