Gold Prices Hold Their Ground

Gold was volatile Thursday as the U.S. dollar rebounded.

Author:: Alix Steel
Publish date:: Nov 11, 2010 3:05 PM EST

NEW YORK (

) -- Gold prices were volatile Thursday as the precious metal's rally contended with a stronger U.S. dollar.

Gold for December delivery settled $4 higher at $1,403.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,417.60 and as low as $1,396.50 on Thursday.

The

U.S. dollar index

was adding 0.63% to $78.17 as the euro dipped 0.71% to $1.36 vs. the dollar. The spot gold price rose more than $4, according to Kitco's gold index.

Gold prices were choppy all day. An initial rally on safe-haven buying was sunk by U.S. dollar strength and euro weakness before short covering drove prices back up to settle above $1,400.

Gold continues to take direction from a weaker euro and stronger dollar. The euro is struggling to stay above water as the financial stability of the eurozone is called into question again. Ireland is leading the fear charge this time with the yield on its 10-year note rising to 8.90% compared with Germany's, the safest European Union economy, which has a 2.45% yield.

Investors are unwilling to lend money to Ireland for fear that the country might default on its debt, might have to restructure its debt, might have to tap the EU/International Monetary Fund bailout fund, and that new austerity measures which Ireland needs to pass in early December might put too much stress on its economy.

The spotlight on Ireland also spilled over to Greece, Spain and Portugal. Greece can barely tap international debt markets and is struggling to meet its deficit reduction targets due to weak revenue. Massive unemployment has offset higher taxes and is preventing the government from making enough money.

The yields on the 10-year bond for Spain and Portugal were 4.5% and 7.23%, respectively, which puts those counties on the chopping block as well.

The eurozone drama is providing a backdrop for higher gold prices over the long term. "Investors will come in and buy physical gold when they get concerned

about defaults or moving in the direction of defaulting on debt," says Nicholas Brooks, head of research and investment strategy for ETF Securities.

Brooks brushes off steep corrections and thinks prices will keep moving higher. "Many investors have not actually participated in this rally ... and have actually been waiting for a long time now for the big corrections so they can get in ...

so any correction will be relatively short-lived."

Wednesday's correction fit the bill.

The gold price on the Comex took a double-digit hit on Wednesday

as traders digested new margin requirements for silver, namely how much money they have to put upfront to buy a silver contract.

On the flip side, as seen Thursday, rallies can also be short as investors take profits where they can especially as the stock market pulled back following

Cisco's

(CSCO) - Get Report

disappointing revenue guidance.

The currency debate at the G20 meeting in South Korea so far has not yielded any big surprises and has been little short-term help for gold prices. All the countries agree on promoting global growth but not on specifics of any exchange rate currency regulation. Brooks says the outcome doesn't matter, but that any currency debate is good for gold as it highlights gold's appeal as a safer form of money.

Despite all the recent gold hype, the physically backed gold exchange-traded fund,

SPDR Gold Shares

(GLD) - Get Report

, has only shed 2.43 tons since Monday. Investors don't seem to be committing new money to the ETF but aren't selling their long positions either.

A higher-than-expected inflation reading out of China should provide some support for gold prices. The core consumer price index for October was 4.4% compared to the anticipated 4%. China has taken steps recently to cool inflation expectations by increasing the amount of money banks must hold in their reserves, but with minimal results. Investors like gold during times of inflation as a safer wealth preserver.

India was also a hot topic among gold bugs today as the World Gold Council said in a report that the world's largest gold consumer would likely recover in 2010 to pre-2009 levels.

India is typically a price sensitive market despite the country's tradition of buying gold jewelry during wedding season and religious festivals. In the second quarter, India jewelry demand fell 2% to 123 tons versus the same quarter a year earlier.

The World Gold Council predicts that as consumers adjust "their price expectations, a further rise in gold jewelry and investment demand could be anticipated" and continued in the long term.

Silver prices

were settled 54 cents higher at $27.40 while copper closed up 5 cents to $4.02.