) --

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, 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.

Gerald Chen-Young, chief investment officer at the United Negro College Fund, which invests in the metal, says that gold is too important in Indian culture to have them stop buying gold all together. "It has industrial use and an aesthetic use ...they will continue purchasing gold."

"The move by the Fed signaled to the market that thing were much worse than previously thought," says Chen-Young, "and things will remain that way. Gold is a natural beneficiary of capital flows during time where things are not so good." He thinks that the disinflation and deflation worries that follow long periods of deleveraging, like the one we are in now, are already priced into the gold market. What isn't priced in yet is large scale buying by central banks and big institutional money managers looking to diversify their holdings.

"Gold is behaving like an asset class," says Chen-Young, "so with the uncertainty from the euro central banks large institutional managers are diversifying their holdings and gold has become increasing a component of reserve holdings."

Gold as a store of value can be seen today by looking at the physical market, where prices are climbing faster than those on the futures market. Futures traders are regrouping after Thursday's options expiration, but worries are not surfacing over margin hikes. When futures markets see big spikes, the CME can raise the amount of money traders must shell out to buy a futures contract. It serves to shake out speculators from the market and curb volatility.

If prices launch a fast run to $2,000, the CME might take action. "Should the CME take strong action on margins and trade size, then gold could hit a hard stop," wrote Global Hunter Securities in a recent note. "Should this occur, then there is the risk that gold might fail to regain the $1,700 level until much greater dysfunctions were to occur in inflation and the debt in the United States."

In August and September of 2011, the CME hiked margins by 54%, which was a big trigger in gold's subsequent 18% selloff through year end. "At the same time, if gold maintains its trend somewhere along the $1,600 to $1,700 level for at least three months," says Global Hunter Securities, "then the pressure on exchanges to crack down on speculative trades at $1,900 might diminish."

Gold mining stocks

were rallying Friday.

Kinross Gold

(KGC) - Get Report

was up 2.72% at $11.72 while

Yamana Gold

(AUY) - Get Report

was 2% higher at $17.41.

Other gold stocks,


(AEM) - Get Report


Eldorado Gold

(EGO) - Get Report

were up at $39.24 and $15.04, respectively.


(NG) - Get Report

was climbing more than 7% to $10.72 after news broke that Vanguard Precious Metals and Mining Fund holds an 8.9% stake of outstanding shares.


Written by Alix Steel in

New York.

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

Alix Steel


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