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Gold Prices Build on January's 11% Rally (Update 1)

Murenbeeld thinks gold could spike to $2,000 an ounce this year, but won't average that price as a stronger dollar could be a headwind if gold and the euro maintain their positive correlation. "On a day to day basis it appears what the euro does is what gold is going to do," he says, but "if you look at that correlation over the past couple of years it really breaks down," which means investors can't count on that correlation always being a negative for gold. Murenbeeld says the longer term correlation between the two assets is actually zero. "Net net European problems will be positive for gold [even though] there could be shocks on the negative side."

Adding further pressure on the dollar Wednesday and further helping gold was some positive news out of Europe. Portugal raised 1.5 billion euros at lower yields. Although demand was somewhat tepid, the lower interest payments were a relief as the country's borrowing costs have been on the rise on speculation the country might need a second bailout. Germany also raised more than 4 billion euros over 10 years at an average yield of 1.82% lower than the previous auction. Demand, however as well, was a little light.

The euro also gained vs. the dollar on reports that Greece would reach a final deal with private bondholders on what kind of loss they would have to take in their debt swap deal. Bondholders are exchanging old debt for new debt and might take a loss of more than 70%. Greece and investors were also debating the interest payment on the new debt. Reports indicate it might be a 3.75% compromise.

Gold had a big run in January, up 11%, and some experts are bracing for a possible profit taking pullback. "Eight weeks up for gold is probably a stretch now and ripe for something to happen to induce some profit taking," says George Gero, senior vice president at RBC Capital Markets, "but the technical and fundamentals don't signal a reversal."

Gold mining stocks were volatile Wednesday. Kinross Gold (KGC - Get Report) was slightly lower at $11.25 while Yamana Gold (AUY - Get Report) was 0.2% lower at $61.36.

Other gold stocks, Agnico-Eagle (AEM - Get Report) and Eldorado Gold (EGO - Get Report) were trading mixed at $37.46 and $15.15, 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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