Gold Prices Stage Rally After 7% Selloff (Update 1)

NEW YORK (TheStreet ) -- Gold prices were mounting a rally Friday as bargain-hunters stepped in and took advantage of low prices and a wobbly U.S. dollar to buy the metal.

Gold for February delivery was rising $19.80 to $1,597 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,603.50 and as low as $1,572.10, while the spot gold price was up $23, according to Kitco's gold index.

Silver prices were adding 31 cents at $29.59 an ounce. TheU.S. dollar index was rising slightly at $80.28.

Gold prices shook off more bad news from Fitch, which put the ratings of 6 European countries like Spain and Italy on credit watch negative. The news was countered as Standard & Poor's reaffirmed France's triple A credit rating. However, the country's outlook was revised to negative from stable. Investors were also more interested in buying gold at a discount.

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Gold prices have fallen 7% this week and the metal has had a hard time finding buyers as the price broke below its 200-day moving average. Now gold has to reclaim the $1,610 an ounce level and fast to give confidence to traders. If that level is retaken then buy stops could be activated, meaning traders would jump back into gold and accelerate any up-move.

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James Moore, research analyst for FastMarkets.com, said that part of Friday's rally is short-covering -- in which traders buy back previously sold shares at a lower price and pocket the difference -- as well as bargain-hunting as the metal is extremely oversold.

"However, the threat of further liquidation will continue in the run-up to year-end, with thin conditions to magnify the problem," he said.

Volume tends to thin out towards the end of the year which can exaggerate any price swings. Big gains in gold might be capped by a firmer U.S. dollar index which was still stubbornly above the $80 level.

Any kind of rally might also be short-lived as traders like Anthony Neglia, president of Tower Trading, sell any rallies to raise cash.

"Any bounce has to be sold ... We are in a trading range unless we get back and over $1,650 an ounce," he said. Neglia had a price target for gold in 2012 of $2,000 an ounce based on traders buying those contracts in the future -- "I still haven't seen a bailout of our higher price and longer dated positions [but] right now everything is about the dollar."

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