Gold clings to gains on weaker dollar

By Alix Steel

Updated at 4:30 p.m. ET

Gold prices edged higher Tuesday as the U.S. dollar fell on hopes that Europe will make progress in stemming its debt crisis.

Gold (-GC) for February delivery settled up $4.40 at $1,718.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,721.70 and as low as $1,707.20 an ounce while the spot price was up $9, according to Kitco's gold index.

Silver (-SI) prices finished down 29 cents at $31.95 an ounce while the U.S. dollar index was down 0.2% at $78.99.

Gold prices held their ground after a monster rally Monday that pushed prices up 1.5%. A stronger U.S. stock market was also helping the metal, as investors had less need to dump gold for cash.

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The euro, and consequently gold, shook off a mixed Italian debt auction. The country was able to raise the money it needed, but had to pay up to do so, with the 10-year yield soaring to 7.65% versus 6% a month ago. Investors were also eying a eurozone finance ministers' meeting today that will address beefing up the firepower of the region's bailout fund, as well as Greece's next 8 billion euro chunk of bailout money needed in early December.

"Further pockets of bargain hunting and safe-haven related buying will help support the gold price in the coming sessions," says James Moore, research analyst at FastMarkets.com, "but as a whole we expect the recent trend of mixed volatile trade to continue with the metals vulnerable to further bouts of cash generating related long liquidation."

Indeed the latest commitment of traders report for the week ending November 22nd was mixed. On the one hand, total long positions fell by almost 13,000 contracts, which showed investors have needed to sell gold to raise cash, while total short positions decreased by 26,000 contracts, which means a portion of gold's recent rally can be attributed to short covering.

Short traders in essence borrow shares and sell them at one price, hoping the price goes lower so they can buy back those shares at a discount, return them to the broker and pocket the difference. When the price rallies instead, traders with short positions then must scramble to buy back those shares at the lowest price they can in order to stem losses, which often adds to additional buying pressure and still higher prices.

Phil Streible, senior market strategist at R.J. O'Brien, says short covering could also be continuing. "$1,700 was a key level of resistance and we blew through that and that is where short covering intensified."

"If we can get a two-day close over $1,720 or we can take out $1,750, it's going to start a new technical buy pattern," says Streible, adding, "as long as prices can hold these levels we will probably continue higher."

Gold mining stocks were mostly higher, building on Monday's huge gains. Barrick Gold (ABX) closed up 0.8% at $49.93 after rallying 4.4% Monday, while Newmont Mining (NEM) added 0.1% to finish at $65.29. Goldcorp (GG) rallied 1.2% to $49.67, and NovaGold (NG) tacked on another 0.8% to close at $10.71 after surging 10% Monday. 

RandGold Resources (GOLD) rebounded 7.2% to finish at $104.51 after a terrible Monday, when shares tanked after the company announced the latest in a series of downward production revisions.