Gold Prices Recover on Weaker Dollar

Gold prices recovered Friday after a dramatic 3% one-day selloff as the U.S. dollar came under pressure.

Gold for December delivery closed $4.90 higher to $1,725.10 an ounce at the Comex division of the New York Mercantile Exchange although gold was losing steam in after-hours trading. The gold price has traded as high as $1,738.50 and as low as $1,711.40, while the spot gold price was up $4, according to Kitco's gold index. Gold's strength was entirely due to the change in the U.S. dollar as physical demand was actually $2 lower, according to Kitco's index.

Silver prices added 92 cents to settle at $32.41 an ounce. TheU.S. dollar index was down 0.29% at $78.05.

Gold prices stabilized after a broad market selloff Thursday which indiscriminately dragged down stocks and commodities. At the core of gold's volatility is fear radiating from the eurozone as borrowing costs rise for Spain, Italy and France. Anything that pressures the euro and spooks markets bleeds into gold as investors need to raise money to cover losses or just want cash.

"When you have a sharp market selloff you get fund redemptions, you get individuals closing accounts or taking money out and you get margin calls," explains Adrian Day, president of Adrian Day Asset Management, "and you get forced selling ... so they sell gold."

Day believes that investors sell what they can, not what they want to, and as a result gold prices will stay volatile but keep moving higher. "People have been buying gold because they don't trust paper money ... and nothing has changed in that respect."

Not everyone agrees. Jon Nadler, senior analyst at Kitco.com, is very concerned that gold prices aren't making record highs despite the fact Europe is in its worst chapter yet of its sovereign debt crisis. "Frankly the fact that it's not trading at $1,900 plus is a worrisome sign to me."

"Gold is seen as rallying if the situation is reso! lved and the European Central Bank prints money to assuage everybody. I think volatility is what we are going to be looking for the next several months or so but that after February gold has a bit of a problem." Nadler thinks that high gold prices are overdependent on investment demand. Investors tend to not buy gold in the first few months of the year. If that is coupled with a slowdown in physical demand in China, which will also enter a seasonally slow buying period, gold could take a hit. "We are left with having to depend on crises," says Nadler.

"I think you could argue that gold could be trading as low as the $1,200-$1,300 level if it were not for some safe haven demand that came into the picture in the third quarter but right now when it is most needed it's not there," argues Nadler

Gold however continues to find support from negative real interest rates around the world - the interest rate minus the inflation rate - as money in the bank is worth less and people buy gold as a wealth preserver. European Central Bank president, Mario Draghi, said today that the downside risk to the economy outlook has increased and weaker activity could moderate any price pressures. This could mean that the ECB will continue slashing rates.

At his first central bank meeting as president, Draghi cut rates by 25 basis points to 1.25% and weak growth and downward pressure on inflation could lead to more cutting. Inflation in the eurozone is currently 3%.

The short term outlook for gold is nonetheless murky at best. The market is still trying to shakeout the after effects of MF Global's bankruptcy, with traders unable to pony up more cash to trade their future positions at another firm possibly liquidating some positions. Margin requirements at the CME -- the amount it costs to trade a futures contract -- had been suspended for MF clients but were re-installed on Thursday, further pressuring gold prices as traders neede! d cash. Buying remains scarce Friday as traders also even out their positions into the weekend and into a shortened holiday week not wanting to be caught betting heavily against or for gold.

Gold mining stocks were slightly lower Friday. Kinross Gold(KGC) was down 1.76% at $12.85 while Yamana Gold(AUY) shed 0.65% at $15.40. Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO)traded lower at $44.90 and $17.16, respectively.

New York.