Gold Prices Claw Their Way Higher

Gold prices reversed Tuesday's declines as the dollar sold off.
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NEW YORK (

TheStreet

) --

Gold prices

gained ground Wednesday on a weaker dollar and technical trading.

Gold for December delivery was adding $8.20 to $1,344.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high $1,348.10 and as low as $1,331.10.

The

U.S. dollar index

was slipping 1.35% to $77.15 while the euro was rallying 1.74% to $1.39 vs. the dollar. The spot gold price was up $9.20, according to Kitco's gold index.

Gold prices were recovering after plummeting 2.5% Tuesday on fears that a surprise rate hike in China would crimp demand for the precious metal. The dollar popped more than 1%, which also hurt gold, a dollar-backed commodity, and made the metal more expensive to buy in other currencies.

"

Gold is vulnerable to a deeper correction should equities extend lower," says James Moore, analyst at

thebulliondesk.com

in his daily metals report. "However, we expect gold, and to a lesser extent silver, to remain underpinned by investment demand as players diversify from fiat currencies and longer-term inflation concerns."

Gold's violent correction Tuesday points to more speculative trading by hedge funds, say some experts, which can also explain the violent rallies in gold as well. Despite the sell-off, the popular gold exchange-traded fund,

SPDR Gold Shares

(GLD) - Get Report

, only shed 1 ton as longer-term investors still held on to their gold positions.

Other seasoned gold analysts disregard a 2% move in the gold price. John Doody, editor of

goldstockanalyst.com

, whose top 10 stocks are up 39% year to date, says "if we were talking about a 2% move on a $10 stock, it would be 20 cents and we wouldn't even be having this conversation ... nothing has changed in the long term ... quantitative easing will drive gold higher."

Video: Gold Fundamentals Still Intact >>

Gold will continue to look for direction from the

Federal Reserve

and the dollar. Numbers are starting to trickle in on the amount of quantitative easing. The previous Fed debt purchase program was $1.7 trillion, but current numbers are ranging anywhere from $1 trillion to $500 billion.

Investors had been buying gold as protection against future inflation, betting that the Fed would enter into another huge monetary easing program. If the number disappoints or the duration is shorter than expected, the inflation fear wouldn't be as significant and gold prices could take a hit.

Investors must wait for the Fed's next FOMC meeting in early November, but will be taking a cue from the release of the Fed's Beige Book, which said that economic activity continues to rise, but at a "modest pace." The book details economic conditions across the Fed's 12 districts, and the less negative outlook might prompt speculation that the Fed might not need to be as aggressive with its quantitative easing. Gold prices were continuing higher in after-hours trading.

In the meantime, the dance between bargain hunters and profit-takers should continue as gold bulls take advantage of price dips and traders sell gold at tops to book gains. Doody says for new gold investors they should be buying a third to half of their initial position at the time they are entering the market and then "you've got money in reserve. If gold comes back, you've got buying power to prop up your portfolio. If it keeps running ... you can follow it higher.... Or if you simply stay pat at least you have some gold exposure."

Price dips might also help physical buying, especially in price sensitive markets like China and India. The latter is in the middle of its festival season, and then China will start its New Year festivities, both of which come with the tradition of giving gold as gifts. Both markets stay skittish at record high prices, but Adrian Ash, head of research at BullionVault.com, says that "pullbacks like we got Tuesday are likely to meet good phsyical bids in Asian trade."

Silver prices

settled up 8 cents to $23.86 while copper closed 3 cents higher at $3.79. Both metals also fell 2.5% Tuesday on fears that a rate hike in China would curb spending on construction and electronics and crimp demand for industrial metals.

Image placeholder title

Gold mining stocks

, a risky but profitable way to

buy gold

, were reversing their big losses from Tuesday.

Yamana Gold

(AUY) - Get Report

was up 1.97% to $10.86 while

Freeport McMoRan Copper & Gold

(FCX) - Get Report

was 3.39% higher at $95.86. Other gold stocks

New Gold

(NGD) - Get Report

and

Gold Fields

(GFI) - Get Report

were trading at $6.77 and $15.58, respectively.

Many gold analysts were nibbling at preferred gold stocks at lower levels but were warning of a deeper correction over the short-term.

--

Written by Alix Steel in New York.

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