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Gold Prices Pop on Weak Dollar

Stocks in this article: GOLD GLD

NEW YORK ( TheStreet ) -- Gold prices popped Monday, boosted by a weaker U.S. dollar and strong physical buying.

Gold for December delivery added $25.10 to settle at $1,710.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,722.40 and as low as $1,684 an ounce while the spot price was up $30, according to Kitco's gold index.

Silver prices were rising $1.13 at $32.14 an ounce while the U.S. dollar index was down 0.57% at $79.16.

Gold prices rallied as the U.S. dollar weakened against the euro on hopes that a stronger fiscal union between the 17 nations on the currency would help stem the debt crisis. Reportedly eurozone nations led by German Chancellor Merkel and French President Sarkozy are in talks to create more fiscal unity among those countries on the euro -- that is the austerity measures already agreed to would be enforced by the eurozone. Countries would, in essence, give up some sovereignty to save the euro.

The hope is that the European Central Bank will then feel more confident about becoming the lender of last resort by buying more sovereign bonds for an extended period of time -- something the central bank was reluctant to do because it thought struggling countries would have less impetus to implement austerity measures. The ECB has been providing short term lending to countries like Greece, Italy and Spain but has done little to lower longer term borrowing costs as private investors shy away from Europe without the ECB's extended support.

There were also rumors that Italy would tap the International Monetary Fund for aid. Although later denied by the European Commission, the news helped to support the euro, weigh on the dollar and help gold.

Further cheering the gold market was strong physical buying. The SPDR Gold Shares (GLD) now holds almost 1,300 tons as investors ramped up gold buying on last week's selloff. With stocks mounting a big rally, traders will also have less need to liquidate gold.

Barclays wrote in a recent note that Exchange Traded Products grew more than 7 tons last week taking total metal to a fresh record at 2,273.5 tons. "We are bullish and look to buy against the $1,600 area. A break above resistance near $1,736 would confirm our view and open our targets near $1,803 and then the $1,840 area.

In the most recent commitment of traders report for the week ended November 15th, the latest report was delayed due to the U.S. holiday, investors added 13,000 total long contracts and 17,000 short contracts, which means part of gold's recent rally could be chalked up to short covering.

"It's a little bit of a trifecta," says Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. "Great retail U.S. news, you've got some positive momentum out of Europe, to a certain extent there is a little bit of short covering, and the fourth piece is China."

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