NEW YORK ( TheStreet ) -- Gold prices settled at $1,600 an ounce Tuesday as fresh new year buying buoyed the precious metal after it bounced off of key technical levels.

Gold for February delivery closed $33.70 higher at $1,600.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,608.70 and as low as $1,566.80 an ounce while the spot price was up $34, according to Kitco's gold index.

Silver prices added $1.65 to close at $29.57 an ounce while the U.S. dollar index was down 0.8% at $79.56.

"It's all about the euro," says Anthony Neglia, president of Tower Trading, who says that higher gold prices have more to prove despite the fact that they bounced off $1,523 an ounce -- a key technical level. "Gold can't sustain the rally for just a day," warns Neglia, who is selling rallies and needs to see gold close over $1,625 an ounce to get more optimistic.

A weaker U.S. dollar and stronger euro were helping support higher gold prices as well as gold's 10% 2011 finish. A 10% gain might serve to attract investors looking for top performing assets as the S&P ended the year flat, but those remembering gold's volatility -- that gold closed down 18% from its intra-day high of $1,923 -- might be reluctant to bet big.

The latest commitment of traders report for the week ended December 27th, shows this conflict. Total long positions fell by 5,200 contracts while total short positions also fell by almost 3,000 contracts. "The latest data shows net fund longs are at the lowest since April 2009 in gold," says James Moore, research analyst at, "suggesting plenty of upside price potential once sentiment improves."

Part of today's rally could also have been led by short covering says George Gero, senior vice president at RBC Capital Markets. "Look for closes above $1,615 to add new buyers from funds that may have missed last week's buying opportunity." Gero warns, however, that gold could be vulnerable to profit taking if prices can't maintain the rally.

Stan Dash, vice president of applied technical analysis at TradeStation, agrees. "There may be enough demand, if the dollar has topped for now, to absorb a lot of that, but large holders will be liquidating into this rally." Dash says if gold prices can break above $1,624, the 200-day moving average, and above $1,633 an ounce, a short term average, then he will have more conviction in the rally.

"This bounce is impressive," says Dash, but "we are following what is going on in Europe." Dash doesn't think that gold is acting as a safe haven as political tensions heat up between Iran and the U.S. because the metal and stocks are moving higher together. If gold was a safe haven the two would be moving inversely to each other. " I would caution those looking to gold as protection against weak stocks."

The latest minutes from the Federal Reserve's last meeting was a non event for gold, but might help to sustain a longer rally. The Fed indicated it might keep rates low past its initial target of 2013. Policymakers will also give their individual forecast on the fed funds rate as well as their economic predictions, which might make the Fed's policy more transparent. The Fed will also lay out expectations of its balance sheet which means more direct hints of quantitative easing or tightening.

If rates are kept low for longer than expected or the Fed explicitly hints at pumping more money in the system, gold could rally. If inflation rises faster than interest rates, the dollar in the bank is worth less and gold becomes an attractive hard asset to counter paper money devaluation. The Fed's next meeting is the last week in January.

Gold is also ignoring disappointing import news from India. The Bombay Bullion Association said that the country imported 125 tons of gold in the fourth quarter of 2011, down 55% from expectations, despite seasonally strong factors like Diwali, the festival of lights, where consumers buy a lot of gold. India imported 878 tons of gold in 2011, which was down more than 8% year-on-year. To make matters worse, in the first quarter India might import 143 tons, just half of what it did in 2011.

"For the time being the gold price will not find any support from this side," says Commerzbank as demand has been battered as gold became too expensive to buy in rupee terms and as interest rates remained high. These low demand figures put a lot of pressure on China to make up demand.

"I do see the slowdown in India as an aberration ...but China is continuing to gain on India in terms of consumption of gold," says Marcus Grubb, managing director at the World Gold Council, who was referring to the slowdown in India from the third quarter.

China represented 28% of global jewelry buying in the third quarter and for only the fourth quarter since 2003 outpaced Indian demand. Grubb says China benefitted as it let its currency be revalued upwards against the dollar versus India which had to contend with a falling rupee- thereby making it more expensive to buy gold.

"We think imports into China could be 400 tons this year," says Grubb which means China might be on track to consume 747 tons of gold in 2011. India's gold market was deregulated 20 years ago compared to just 10 years for China, which means "China's rate of consumption is catching up to India's rate," says Grubb and it needs to continue as Indian demand slows.

Gold mining stocks were soaring Tuesday. Kinross Gold ( KGC) was rallying 5.53% at $12.03 while Yamana Gold ( AUY) was jumping almost 4% at $15.27.

Other gold stocks, Agnico-Eagle ( AEM) and Eldorado Gold ( EGO) were trading higher at $37.81 and $14.54, respectively.

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-- Written by Alix Steel in New York.

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

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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