Gold Prices End Week 4% Higher (Update 1)

NEW YORK (TheStreet ) -- Gold prices settled higher Friday helped by physical buying and a weaker U.S. dollar.

Gold for February delivery added $5.50 to settle at $1,732.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,734.80 and as low as $1,714.20 an ounce while the spot price was adding $13, according to Kitco's gold index.

Silver prices rose 4 cents to close at $33.79 an ounce while the U.S. dollar index was down 0.61% at $78.92 on disappointing fourth quarter growth numbers in the U.S. News that Fitch downgrade the credit ratings of Spain, Italy, Belgium, Cyprus and Slovenia was not even enough to push the euro lower against the dollar.

Investors took some profits in early trading after gold prices jumped 3.7% in two days as the Federal Reserve said it would keep rates low until the end of 2014. But any dip in prices was met with strong physical buying as the U.S. dollar headed lower.

Vote: Where will gold prices finish in 2012?

"Support is at $1,700," says George Gero, senior vice president at RBC Capital Markets, "and resistance is at $1,775 an ounce." Despite the euphoria gold has been experiencing since the Fed's interest rate announcement, some experts are sounding warning signs.

Jon Nadler, senior analyst at Kitco.com, is watching the dollar. "It didn't take a huge hit in the wake of this announcement as one would have expected it to have," says Nadler. He is also speculating that the Fed could still raise interest rates sooner than the end of 2014. "Much like the European Central Bank guessed wrong in raising [rates] too early ... I think the Fed could be caught eating their words because of not raising soon enough." Six of the 13 voting members at the Fed did vote for raising rates during 2012 or 2013 and most members see long term interest rates at 4%-5%.

Now the question is how will physical demand hold up. Nadler is worried the first quarter might be difficult for higher gold prices. "Basically we have physical demand headed into the summer season probably ebbing and unless India steps up to the plate in May with a good off-take we could meander around this broad channel of about $1,522 to $1,720 an ounce."

Indian gold demand fell off a cliff starting in the third quarter of 2011 as prices spiked to an intra-day high of $1,923 an ounce. Demand in the first half of the year, however, was much stronger as consumers bought gold in anticipation of higher prices.

Gold's recent rally could have a split effect -- it could propel demand, especially if the expectation is that gold prices will run to $2,000 on the Fed's easy money policy, or it could scare Indian investors away as they grapple with higher prices and volatility.