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Federal Reserve Ignites Gold Price Rally (Update 1)

NEW YORK ( TheStreet ) -- Gold prices climbed higher Thursday, still bathed in the afterglow of the Federal Reserve's commitment to cheap money through late 2014.

Gold for February delivery added $26.60 to close at $1,726.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,731.50 and as low as $1,703 an ounce while the spot price was adding $13, according to Kitco's gold index.

Silver prices jumped 62 cents to settle at $33.74 an ounce while the U.S. dollar index was down 0.02% at $79.45.

Gold prices have rallied almost 4% in two days on the news the Federal Reserve would leave interest rates low through the end of 2014 and the door open to more bond buying. The result is more cheap money in the system for a longer period of time. The dollar was lower against all currencies on the news, which was pushing gold higher as the metal becomes cheaper to buy in those currencies. As the Fed commits to a weak dollar policy, gold becomes attractive to investors as a wealth preserver.

Ross Norman, CEO of Sharps Pixley, believes the move pulled gold over key resistance levels and that prices will climb steadily higher from here. "Longer term gold players were greatly encouraged by Mr. Bernanke's comments," says Norman, "and there will be a general rebuilding in positions on the Comex." Norman says that as of the end of last week there were only 120,000 long positions on the Comex -- around a three year low -- suggesting that any kind of long interest would be supportive of prices.

Gold's rally was three fold. The first leg of the move was rapid short covering. Many traders had been selling positions and/or shorting gold headed into today's options expiration, and the Fed's announcement forced them to quickly buy back positions. That move pulled gold prices to the $1,700 an ounce level, which then triggered buy orders, where traders previously committed to buying gold at that price. A close at $1,700 also then triggered buy orders internationally. The SPDR Gold Shares (GLD) added 9 tons of gold yesterday. "We will move gently back to the $1,900 level over the next few months," says Norman, "but won't happen rapidly."

Norman thinks the Fed in essence squashed gold's recent period of price consolidation, but that a huge spike up isn't in the cards. One of the biggest drags on gold will be the situation in Europe and a better economy in the U.S. "I do think one of the big drags is that the U.S. is placed to make a recovery better than others," argues Norman, which might at some point help support the dollar and weigh on the euro especially if questions remain over the solvency of the southern Eurozone nations.

Gold should be seen as a safe haven asset, the worse off Europe gets the more investors should buy gold as protection, but that hasn't been happening as a stronger dollar has trumped as the safe haven of choice. Norman thinks there are four or five years left in this bull-run and that the gold price could double from current levels at its peak. GFMS, an independent research consultancy, on the other hand, thinks that the bull-run could end in 2013.

GFMS, in its 2011 Gold Survey report, forecasts a volatile year for gold prices with gold sinking as low as $1,600-$1,550 an ounce, averaging out at $1,760 and perhaps spiking to $2,000 an ounce. But then the party is over.

"We think the peak would be towards the end of this year or maybe in the first half of next year," says Neil Meader, research director at Thomson Reuters GFMS. The main end to gold's 10 year bull run would come with a renewed faith in currencies as the structural imbalances that have impeded paper money slowly start to fade. So far there have been no revisions made to this forecast since the Fed's announcement.

David Banister, chief investment strategist at, still expects the gold bull run to come to an end in 2013, but says this is the big leg up that will eventually take gold to record levels. Banister is looking for gold to hit some resistance around $1,780 an ounce but then proceed higher. "[This] is a bullish wave and will continue on for a while into 2013."

Banister thinks it will take about 12-18 months for gold to hit its top of around $2,300 an ounce.

The one downside to a big rally in the gold price is if Indian demand slows further. According to GFMS, the first half of 2011 saw very strong buying from India as consumers rightly anticipated higher prices in the future and loaded up on "cheaper" gold. As gold soared in the back half of the year, demand slowed to a crawl. The World Gold Council said that jewelry demand tanked 28% in the third quarter. From July to December gold prices in rupee terms were up 25% as the dollar appreciated against the local currency and as inflation ballooned to 10% making gold too expensive to buy.

Volatility and high prices tend to result in lackluster demand from India and consumption from the country is key for higher gold prices as India and China make up 40%-50% of global gold demand. Norman thinks that India will eventually get used to higher prices. "Indian traders tend to be bargain hunters," he says, "they buy on the dips." If prices now climb slowly that could help India get used to higher prices, but it is definitely a wild card for gold along with any chance of a stronger dollar.

Gold mining stocks continued their own rally Thursday. Kinross Gold (KGC - Get Report) was adding 1.11% at $11.40 while Yamana Gold (AUY - Get Report) was 1.12% higher at $17.11.

Other gold stocks, Agnico-Eagle (AEM - Get Report) and Eldorado Gold (EGO - Get Report) were trading slightly higher at $37.92 and $14.17, respectively.

-- 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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