Gold Prices Gain on Greek Debt, Middle East Tensions (Update 1)

NEW YORK (TheStreet ) -- Gold prices clawed higher Monday as investors eyed uncertainties surrounding Greece's debt crisis and increased tensions in the Middle East.

Gold for February delivery closed up $14.30 at $1,678.30 an ounce at the Comex division of the New York Mercantile Exchange. Prices, however, gave up their gains and were falling in after hours trading. The gold price has traded as high as $1,681.80 and as low as $1,663 an ounce while the spot price was adding $10, according to Kitco's gold index.

Silver prices added 59 cents to close at $32.27 an ounce while the U.S. dollar index was down 0.54% at $79.73.

Short covering -- where investors who had been betting on a fall in the gold price buy back positions -- might be a main explanation for gold's rally Monday, according to George Gero, senior vice president at RBC Capital Markets. In the latest commitment of traders report, speculative short positions on the Comex fell by 2,100 contracts while 1,000 long contracts were added meaning that much of gold's recent rally can be chalked up to short covering.

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"Gold is reaching another technical area," says Gero, who thinks a close above $1,675 an ounce could mean more momentum for prices. There are a lot of uncertainties that could lead investors into gold, such as Greece needing to secure a deal with private bondholders on how much of a loss they will take on a bond swap. A substantial "haircut," where investors exchange current bonds for longer term lower yielding ones, is pivotal for the country in securing 130 billion euros -- its latest bailout money. The euro was rebounding Monday on hopes of a deal, which was weighing on the dollar and, in turn, helping gold.

Germany and France were both successful in raising money in the debt market. There was strong demand and relatively low yields. The European Central bank also bought 2.24 billion euros worth of bond purchases last week which was down 40% from the week before. The ECB has spent more than 200 billion euros on buying bonds, which some might argue is the big "bazooka" investors have been clamoring for. The less it buys means there might be more private demand in the market, another positive for the euro.

The European Union has also agreed in principle to implement an embargo on Iranian oil, highlighting increased political tensions in the region. Geopolitical issues can trigger a flood of safe haven buying into gold. Mark O'Byrne, executive director at bullion dealer GoldCore, agrees that most of the recent action has been short covering but that "if something materially happens [in Iran] then I think the gold price could rise very very quickly and [we would] see it over $1,700 in short order."

O'Byrne says that in the late 1970s and early 1980s gold went parabolic to hit a then high of $850 an ounce. The gains occurred during the Iranian hostage crisis. O'Byrne hints that something similar could happen again.

Physical buying, however, will be muted this week as China closes down for its week long New Year holiday. O'Byrne says that demand has slowed down. "We saw record levels of demand in November and December, which was quite unusual [and] that didn't really continue in January."

O'Byrne has also been noticing a move by investors into physical bullion. "People are choosing to take delivery of coins and bars much more than usual," he says. About 5% used to opt for physical gold and now he is seeing upwards of 15%-20%. "That is symptomatic to the risk that is out there and a [worry about] counterparty risk," as investors stay haunted by the collapse and missing money from MFGlobal.

"The Eurozone debt crisis is very difficult to resolve," says O'Byrne, "and at some point it is going to shift to other debtor nations like U.K., Japan and U.S." He sees gold ownership continuing to rise despite any short term price fluctuations and doesn't think investors will forget about gold even if equities rally and "riskier" assets take center stage.

Despite gold's recent rally, many technicians, those who look at chart patterns to determine future price direction, are warning of another leg down for gold. David Banister, chief investment strategist at TheMarketTrendForecast.com, says he could see gold fall to $1,535 an ounce or lower and that the market seems to be losing interest in gold. After gold hits that lower support level, it will have one more rally up before the bull market ends. "I've always had this general 13 year cycle," says Banister, "so it's very possible that we see the final run in 2013."

Stan Dash, vice president of applied technical analysis at TradeStation, says "we are in a trading range and my bias is to the downside ... If you look at the formation we have had since September, we are making a wedge formation," a technical term that means prices are getting ready to make a big break. Whether that break is to the upside or downside is still up in the air. "If that formation holds up, [gold] should break out next week or the week after."

The problem, according to Dash, is a lack of momentum, which is what gives him his bias to the downside. "The action in the past week has been sloppy ... If you got bullish towards this market, you got pinched, and if you got bearish towards this market, you got pinched, [which means] nobody got happy." That lack of satisfaction for traders is leading to a lack this of strong buying.

Gold mining stocks were higher Monday. Kinross Gold(KGC) was rising 4.21% at $10.64 Yamana Gold(AUY) was up 2.74% at $15.76.

Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were up at $35.47 and $13.64, respectively.

--Written by Alix Steel in New York.

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