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Gold Prices Fight Stronger Dollar to End Higher (Update 2)

NEW YORK ( TheStreet ) -- Gold prices closed higher despite a stronger U.S. dollar and early morning profit taking.

Gold for February delivery added $7.40 to close at $1,620.10 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,626.80 and as low as $1,597.70 an ounce while the spot price was up $7, according to Kitco's gold index.

Silver prices added 19 cents to close at $29.29 an ounce while the U.S. dollar index was up 0.98% at $80.91.

Gold prices shook off a lackluster stock market, a weaker euro and stronger dollar to fight its way higher. In morning trading, gold was weak, as a weak euro dragged on gold. Investors also took profits after gold mounted a three-day rally that pushed prices up 4.6%. But buyers stepped in once gold broke below $1,600 an ounce.

"Gold held $1,600 and the attention of the investor as inflationary and better payroll figures helped gold and silver decouple from copper and crude and the euro," says George Gero, senior vice president at RBC Capital Markets. "Gold investors see opportunities in any sell-off to become bargain hunters."

Gold's recent connection to the "risk on trade," meaning that the metal has been rallying alongside stocks and the euro, can mean that gold as a safe haven isn't a sure thing.

Jeffrey Wright, senior research analyst at Global Hunter Securities, thinks that if there were safe haven buyers in the market, gold would be soaring. Gold "needs an escalation for the safe haven phenomenon to kick in with either international potential conflict," referring to the West's political issues with Iran, a possible oil embargo and a power transition in North Korea.

James Moore, research analyst at FastMarkets.com, sides with Gero, saying that "tensions between Iran and the West will continue to bolster gold, as safe-haven interest increases."

Gero says that a close above $1,615 could trigger buy stops, where traders jump into gold at a predetermined price, which leads to a momentum rally. "Inflation may [also] rear its head when we see fiscal stimulus on two continents."

Wright also cited inflation as a possible reason for gold's persistent 4 day rally. "I think we are seeing some signs towards moderate inflationary pressure not only in commodities but in finished goods and anything to do with inflation is good for gold."

"We've been in such a low inflationary environment, inflation between 2-3%, and if inflation increased a little bit above 3% that is a big move compared to the relative stable inflation environment," says Wright.

Wright sees gold range bound for the year between $1,450 and $1,750 an ounce. "I don't think the bull market is over, near term consolidation that could go on for six months or longer." Wright thinks that until there is a resolution with Europe's sovereign debt crisis, gold prices will have a hard time gaining momentum. Once Europe's crisis is resolved, the dollar will stop gaining against the euro and investors will look at the U.S.' fiscal problems and see the dollar isn't as stable as previously thought.

"They are going to go 'what about us,'" says Wright. "We have no ability to repay this debt and the only way to pay it is to devalue the currency ... gold will definitely come back into focus [when] depreciating the dollar [becomes] a practical policy."

In the meantime, Wright predicts that gold will find strong physical buying support around the $1,500-$1,550 area. Not only will retail investors want to "defend" that area, but central banks might also find that level attractive to buy.

The likely buyers are emerging market central banks like China, Turkey and Russia. Turkey bought 41 tons of gold in November, according to data from the International Monetary Fund. Gold's low for that month was $1,675 an ounce.

For the short term, gold will not only look to Europe but to the U.S. First, gold must digest France's mixed debt auction, which was met with tepid demand and higher yields. Hungary also lowered the amount of money it hopes to raise in its debt auction as yields jumped almost 2% in its last offering.

Then the focus turns to the U.S.' jobs picture with the Labor Department set to release December's unemployment data on Friday. Nonfarm payrolls are expected to increase by 150,000 while the private sector is expected to add 170,000 jobs, according to Briefing.com's consensus. The unemployment rate could rise to 8.7%. ADP said the private sector added 325,000 jobs in December. **

Some analysts have been ratcheting up expectations as weekly initial jobless claims have come in better than expected and as the pace of hiring has improved. Gold will look to the dollar for direction. If the number comes in better than expected U.S. stocks could pop dragging gold higher but if the number disappoints then the U.S. dollar could become the safe haven of choice and hurt gold. Gold was able to shake off a stronger dollar Thursday -- a shift from its recent trend.

Gold mining stocks were jumpy Thursday. Kinross Gold (KGC - Get Report) was down 0.78% at $12.11 while Yamana Gold (AUY - Get Report) was flat at $15.23.

Other gold stocks, Agnico-Eagle (AEM - Get Report) and Eldorado Gold (EGO - Get Report) were mixed at $48 and $14.55, respectively.

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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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