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Gold Prices Pop on Bargain Hunting

NEW YORK ( TheStreet ) -- Gold prices bounced Tuesday as bargain hunters jumped into the market, helping prices recover from a 12% selloff.

Gold for December delivery added $51.70 to settle at $1,652.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,679.20 and as low as $1,616.80 an ounce, while the spot gold price was adding $19, according to Kitco's gold index.

Silver prices rallied $1.56 to settle at $31.53 an ounce while the U.S. dollar index was down 0.59% at $77.58.

Gold prices recovered after a brutal 12%, four-day selloff, which had some experts looking as low as the $1,480 an ounce level for support. Gold picked up traction in overnight trading as bargain hunters stepped in amid options expiration. Traders must decide whether or not to exercise an option (either buy or sell), hold a futures contract or let them expire.

"First $25-$40 [of the rally] is a little bit of a short covering rally," says Anthony Neglia, president of Tower Trading, "but then you are going to find some value players who want to get in at lower levels." Neglia is bracing for more volatility in the middle of options expiration. "It's a wait-and-see kind of game and I'm making my decision after expiration to see how I want to play this."

Stocks were also rallying for a third day as rumors circulated that the European Financial Stability Fund might be expanded to ramp up help for struggling EU nations. Investors stopped panicking and stopped dumping all assets for cash including gold. Although the U.S. dollar index is still at high levels, the price is down slightly, lending more support to gold's rally.

"We may see the new trading range develop at the higher level, $1,625 - $1,700," says George Gero, senior vice president at RBC Capital markets. "Gold's rally is a major relief to investors as ... asset managers sales are [not] now needed as stocks are in a rally mode." Gero does warn of profit taking in after-market hours as traders settle up their options.

Barclays Capital says that the larger backdrop for gold remains unchanged and is "still gold-fertile." The firm says that the eurozone is still behind the curve in tackling its ballooning debt issues. "Macro insecurity amid low interest rates continues to be supportive for gold beyond the near-term weakness."

Most experts are now waiting for physical buying to kick in from China and India as both countries are in the midst of numerous festivals which gives consumers lots of reasons to buy gold. Barclays is expecting demand from India to cushion any deep gold price fall.

China is also preparing for its National Day, a week-long holiday starting October 1st, which is typically a strong gold buying period. The Shanghai Gold Exchange raised margins to 20% from 15% during the period to help combat volatility but they will return to normal by October 10th.

Gold mining stocks were trying to sustain an early morning rally. Kinross Gold (KGC - Get Report) was down 0.72% to $15.16 while Yamana Gold (AUY - Get Report) was rising 0.42% at $14.22. Other gold stocks, Agnico-Eagle (AEM - Get Report) and Eldorado Gold (EGO - Get Report) were trading mixed at $61.94 and $18.18, respectively.

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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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