Gold Closes Shy of Seven-Week High

NEW YORK ( TheStreet) -- Gold prices flirted with seven-week highs Thursday as the direction of the yellow metal was caught between safe-haven buying and profit taking.

Gold for April delivery settled up $1.80 at $1,415.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,418.80, a high for 2011, and as low as $1,408.30 during Thursday's session. The spot gold price was down $1.40, according to Kitco's gold index.

"Gold buyers at $1,400 ... are pausing to reflect significance of Saudi's providing additional crude and today's drawdown figures as the economy is improving," said George Gero, senior vice president at RBC Capital Markets. The Labor Department said that people filing for jobless claims fell last week to below the critical 400,000 mark.

Jeb Handwerger, editor of GoldStockTrades.com, doesn't think that any technical selling will deter gold's safe haven bid. Handwerger sees $1,600 gold and $40 silver as unrest and violence in the Middle East continues to unfold.

Gold prices were taking a hit in after-hours trading, down more than $10. The move was possibly a mix of profit taking, sinking oil prices and comments from Fed president, James Bullard, who said that the Fed might have to consider ending or modifying its $600 billion bond buying program in light of strong economic data out of the U.S.

Bullard doesn't have any voting rights currently but the threat of higher interest rates that might turn real interest rates positive could be enough to scare away those buying gold as an inflation hedge.

Gold was also moving down with oil as rumors circulated that Libyan ruler, Gadhaffi, had been shot, possibly leaving oil exports to function normally.

Silver prices settled down 13 cents to $33.16 an ounce staying firmly committed to a range between $31 and $34.

Rumors circulated again on Wednesday that investment banks had massive short positions in the silver market and if prices stayed above $31 they would be required to buy back their positions causing a parabolic spike in prices.

This news is nothing new. Phil Streible, senior market strategist at Lind-Waldock, said he has been hearing these cries for more than a decade. In the Commodity Futures Trading Commission's bank participation report for the futures market, there were 19,706 short contracts at the beginning of February, about 15% of open interest. A year ago, short positions were more than 37,000, which shows that the shorts are being unwound gradually and are gradually pushing the silver price higher.

The CFTC is currently debating position limits to the tune of 1,500 per holder. This requirement could take years to go into effect, and Streible believes that once that happens banks will have already repositioned themselves to account for the slow unwinding.

Mihir Dange of Arbitrage says that if silver makes new 30-year highs again that might scare the bears into short-covering, but he thinks "the interim the range of $31.27 to $34.33 will stay in place."

Lind-Waldock's Streible also believes that silver could see a 10% correction in the near term. Despite safe-haven buyers, "I think silver will end up getting hit on the industrial side," he says.

Industrial demand accounts for 60% of silver's usage, and construction and auto demand are slowing to a crawl in the Middle East and North Africa. As oil prices in the U.S. surge past $100 a barrel and in Europe to $120, and consumers see a meteoric rise at the pump, global auto demand also will be hurt.

Both gold and silver are still subject to profit-taking especially as other assets sell off and traders need to raise cash.

"Further chart resistance in gold is expected around $1416/1424 and $34.30 in silver," says James Moore, research analyst at FastMarkets.com. "However, the mix of safe-haven demand, inflation concerns and strong retail demand continue to support higher prices with gold poised to challenge December's all-time high of $1431.30 and silver a multi-decade peak at $35.20."

Rate hikes in emerging-market economies might put a crimp in gold's rally. Food prices in India rose to 11.49% for the week ending Feb. 12, and the central bank is vowing to take steps next week to fight inflation. Gold has shrugged off attempts by China to fight inflation, but if India gets really aggressive, it has raised rates seven times in the past year, it could be a headwind for the precious metals market.

Gold mining stocks, a risky but potentially lucrative way to buy gold, were selling off. Yamana Gold ( AUY) was falling 1.33% at $12.28 while Harmony Gold ( HMY) was bucking the trend and was slightly higher at $11.62.

Other gold stocks, Agnico-Eagle ( AEM) and Eldorado Gold ( EGO) were trading at $69.73 and $16.70, respectively.

-- Written by Alix Steel in New York.

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