Gold Prices Recover on Weaker Dollar

NEW YORK (TheStreet ) -- Gold prices recovered Friday after a dramatic 3% one-day selloff as the U.S. dollar came under pressure.

Gold for December delivery closed $4.90 higher to $1,725.10 an ounce at the Comex division of the New York Mercantile Exchange although gold was losing steam in after-hours trading. The gold price has traded as high as $1,738.50 and as low as $1,711.40, while the spot gold price was up $4, according to Kitco's gold index. Gold's strength was entirely due to the change in the U.S. dollar as physical demand was actually $2 lower, according to Kitco's index.

Silver prices added 92 cents to settle at $32.41 an ounce. TheU.S. dollar index was down 0.29% at $78.05.

Gold prices stabilized after a broad market selloff Thursday which indiscriminately dragged down stocks and commodities. At the core of gold's volatility is fear radiating from the eurozone as borrowing costs rise for Spain, Italy and France. Anything that pressures the euro and spooks markets bleeds into gold as investors need to raise money to cover losses or just want cash.

"When you have a sharp market selloff you get fund redemptions, you get individuals closing accounts or taking money out and you get margin calls," explains Adrian Day, president of Adrian Day Asset Management, "and you get forced selling ... so they sell gold."

Day believes that investors sell what they can, not what they want to, and as a result gold prices will stay volatile but keep moving higher. "People have been buying gold because they don't trust paper money ... and nothing has changed in that respect."

Not everyone agrees. Jon Nadler, senior analyst at Kitco.com, is very concerned that gold prices aren't making record highs despite the fact Europe is in its worst chapter yet of its sovereign debt crisis. "Frankly the fact that it's not trading at $1,900 plus is a worrisome sign to me."

"Gold is seen as rallying if the situation is resolved and the European Central Bank prints money to assuage everybody. I think volatility is what we are going to be looking for the next several months or so but that after February gold has a bit of a problem." Nadler thinks that high gold prices are overdependent on investment demand. Investors tend to not buy gold in the first few months of the year. If that is coupled with a slowdown in physical demand in China, which will also enter a seasonally slow buying period, gold could take a hit. "We are left with having to depend on crises," says Nadler.