Gold Prices Rebound on Technical Buying (Update 2)

NEW YORK (TheStreet ) -- Gold prices popped higher, despite a stronger U.S. dollar, as technical traders jumped into the market.

Gold for February delivery closed up $9.50 to $1,664 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,666.80 and as low as $1,645.20, while the spot gold price was adding $7, according to Kitco's gold index.

Silver prices added $1.16 to close at $31.67 an ounce. TheU.S. dollar index was up 0.18% at $80.22.

Gold prices jumped in mid morning trading on technical buying, holding on to gains after prices brushed up against the $1,650 an ounce level. Gold is primarily a "trading affair" today, says Phil Streible, senior commodities broker at RJO Futures. Streible says there is a lot of shorting gold -- that is betting against a higher gold price -- around the high $1,660 level and then a lot of "buying the dip" and short covering -- where traders buy back those positions -- around the $1,650 level. "This pop is technical based trading," he says, "I haven't seen anything dollar specific [to move prices]." A purely technical pop in gold does raise questions as to whether the rally is sustainable.

Anthony Neglia, president of Tower Trading, says the magic number is $1,700 an ounce. "If it doesn't make it there quick, in 1-2 days, look out below. Then gold should break $1,600 by middle of next week. "

Gold prices had been coming under pressure by a stronger U.S. dollar -- a trend which could continue next week. Jon Nadler, senior analyst at Kitco.com, says that gold and the euro are still "holding hands," which means an inverse relationship to the dollar.

"We have to see how this goes into next week," says Nadler, "because a lot of the talks are ongoing with Greece and its creditors. The IMF still hasn't raised the money [nearly half a trillion dollars], so the market jury remains out as to just how sustainable this euro rally will be and what happens to gold in physical terms after the Chinese New Year comes to a conclusion."

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China has been a stronger buyer of gold, adding a huge support to the gold price. The country imported 389 tons of gold in the first 11 months of 2011, but many experts think this may have been strategic buying ahead of the Chinese New Year, which starts next week, and might slow after the holiday.

"Next week is likely to be a volatile week with China closed for the New Year holiday," says William Adams, head of research for FastMarkets.com, "so it may be that the markets consolidate while they wait to see what the mood is once China returns to work on January 30th."

The mood so far is mixed. China Securities Journal reported that there might be 900-1,000 billion yuan in new loans for January. This comes after reports that China is pushing its 5 largest banks to increase new loans by 5% in the first quarter. More money in circulation could help support gold imports, but on the flip side HSBC said that manufacturing in December came in at 48.8. That figure was better than November's data but under that critical 50 level that signals growth.

"If we don't manage to overcome the $1,700-$1,720 level," in gold prices says Nadler, gold could sink to as low as $1,400. "In addition, I think we will see some impact in the re-allocation process that the various funds have already embarked upon," which could lead to a lot choppiness in the price.

Wayne Lin, portfolio manager and investment strategy analyst for Legg Mason Global Asset Allocation, goes one step further. "Given where things are from a fundamental economics point of view, unless we have hyper inflation around the corner, there is a potential for downside risk."