Gold Prices Eke Out a Gain on China's Buying Binge (Update 1) - TheStreet



) --

Gold prices

clung onto higher prices Wednesday, shaking off a weaker euro, as strong physical buying from China boosted sentiment.

Gold for February delivery added $8.10 at $1,639.60 an ounce at the Comex division of the New York Mercantile Exchange. The

gold price

has traded as high as $1,648 and as low as $1,630.80 an ounce while the spot price was up $6, according to Kitco's gold index.

Silver prices

rose 7 cents to close at $29.89 an ounce while the

U.S. dollar index

was up 0.53% at $81.31.

Gold managed to hold on to its gain Wednesday after trading up as much as $18 in overnight trading. Big gains were curbed by a weaker euro, profit taking and a choppy stock market.

"Some people will sell into strength as gold moved above the 200 day moving average," a key technical level, says Will Rhind, head of U.S. operations for ETF Securities. Rhind thinks that some more negative news out of Europe will help gold as investors buy it as a safe haven. "What we're seeing right now is that emergence of that store of value, that safe haven trade."

There were many difficult headlines out of Europe Wednesday. The European Commission said Hungary, which is trying to get bailout money, has not taken enough sustainable moves to tackle its ballooning deficit. Ten year borrowing costs for the country were rising more than 9%.

Vote: Where will gold prices finish in 2012?

Although Germany successfully borrowed 3.15 billion euros at a lower yield to strong demand, investors seemed to be cautious headed into bond auctions from Italy and Spain at the end of the week. Ratings agency Fitch also said that the European Central Bank should do more to help Italy and prevent a "cataclysmic" collapse of the euro.

Evidence of strong buying from China was propping up the metal. The country imported a record 103 tons of gold from Hong Kong in November, up 19% month-on-month and a 483% increase year-on-year, according to Goldcore, a bullion dealer. China has imported 389 tons of gold in the first 11 months of 2011. Expectations were for imports of 400 tons, according to the World Gold Council, but with China ramping up buying that target looks easy to surpass. China's New Year celebration kicks off at the end of the month and consumers could be buying ahead of the festivities.

What makes China's imports even more impressive is that China consumes all the gold it produces and still has to go outside its borders to meet demand. In 2010, China produced 350.9 tons of gold, which was up 8.3% year on year.

"As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge," says Goldcore in a recent note.

For only the fourth quarter since 2003, Chinese jewelry demand outshined Indian demand in the third quarter. The country represented 28% of global jewelry buying. High inflation has helped currently at 4.2%.

Many analysts are expecting prices in China to fall in December, which could trigger more monetary easing. The People's Bank of China is currently holding rates at 3.5%, but the central bank could lower interest rates or cut the amount of money banks must hold in their reserves in order to pump more money into the system.

"A benign Chinese Consumer Prices Index

reading this Thursday should trigger interest rate cuts and support the rally in risky assets," says Canaccord Genuity. Gold typically does well in high inflation loose monetary environments as investors become worried about the strength of paper currencies and head into hard assets like gold.

China's growing middle class is also creating a consumer base to buy gold. By 2015, 44% of China's population will be middle class. The average minimum wage has soared 20% from 2009 to 2010, household income is growing 9% a year while consumption is growing 11%, according to Credit Agricole Securities and Wells Fargo.

Gold still has a lot to prove to most traders. Stan Dash, vice president of applied technical analysis at TradeStation, says that the gold price won't just take off at this level. "It will take more time to work its way through." Dash thinks investors will want to keep unloading on rallies. "There will still be trading in here ... but from a breakout run point of view we are a little far away from that."

Gold mining stocks

were losing steam in late trading Wednesday which might not bode well for gold prices tomorrow.

Kinross Gold

(KGC) - Get Report

was adding 0.57% at $12.88 while

Yamana Gold

(AUY) - Get Report

was down 0.2% at $15.28.

Other gold stocks,


(AEM) - Get Report


Eldorado Gold

(EGO) - Get Report

were trading slightly lower at $37.90 and $14.23, respectively.


Written by Alix Steel in

New York.

>To contact the writer of this article, click here:

Alix Steel


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