Weak Dollar, Chinese Buying Supporting Gold Prices

A weakening dollar combined with bargain hunting, short covering and Chinese physical demand Monday to lift gold prices modestly.

The steady gains so far this year, however, leave the metal shy of its critical 200-day moving average in the $1,630 area, a target that if reached could spark a return to levels seen last year.

Although Indian demand was weak, Barclays Capital said in a note, demand from China remains healthy ahead of the Lunar holidays, volumes traded on the Shanghai Gold Exchange have started the year on a positive note, exceeding the lower volumes traded in November and early December.

The dollar spent the day declining in Asian and European trading, which offered support for gold. The dollar index, which gauges the strength of the greenback against a basket of six major currencies, including the euro, was down 0.33 percent to 81.32.

Gold prices have been rising modestly but steadily since Dec. 29 when they closed at $1,540, attracting investor interest.

Many commodity indexes will rebalance their portfolios this week and because gold prices were strong performers last year - posting a 9.1 percent gain on the Comex - creating headwinds for the yellow metal.

Meanwhile, tensions over Iran's actions in the Strait of Hormuz offered support for both crude oil and gold, which often move in the same direction.

Expectations that Eurozone leaders will continue muddling through their sovereign debt crisis without a convincing fix for either the single currency or the acutely distressed European banks also sustains interest in gold, which has gained in value for five of the last six trading sessions.

The current global macroeconomic environment is very conducive for higher gold prices, Sundeep Sikka, Mumbai- based chief executive officer of the money manager, which runs Indies's second-biggest gold exchange-traded fund, told Bloomberg.

The fundamental outlook for gold remains extremely bullish and paints a rosy picture for gold bulls. We see gold continuing to attract interest even in 2012. Investors are looking for a haven to park their money as the market sentiment for equity is uncertain.

Gold for February delivery was up $1.30 to $1,618, while spot gold rose $2.42 to $1,619.06.

Silver for March delivery increased 25 cents to $28.93, while spot silver added 25 cents to $29.