(Kitco News) - After spending the first two weeks of the year weaker, gold prices could be ready for a bounce, especially if the markets return to worrying about European debt.

February gold futures prices settled at $1,360.50 an ounce on the Comex division of the New York Mercantile Exchange, down 0.6% on the week. March silver futures settled at $28.32 an ounce, a fall of 1.2% on the week.

Several successful bond auctions this week by economically shaky southern European countries – Portugal, Spain and Italy – temporarily eased some of the fears about sovereign debt among peripheral nations. That took away some of the safe-haven demand for gold, said Adam Klopfenstein, senior market strategist with Lind-Waldock. Further asset allocation as investors finished rebalancing commodity indexes also caused some movement out of gold.

China’s central bank announced a rise in the reserve-ratio requirement, due to take effect on Jan. 20, which also pressured prices on Friday.

But once the impact of the Chinese move fades, the market could start worrying again about the longer-term European structural debt problems. This is likely to become a background factor offering support again, Klopfenstein said.

“That’s going to give gold more flight-to-quality buzz. I think gold is going to approach $1,400 next week,” Klopfenstein said. “Anything from there will be based on market momentum. But I do think we’re going to have a strong rally next week.”

He described this week’s European bond auctions as “delaying the inevitable,” or further crises.

“Until we get a clear resolution of the European debt situation…that will be in the backdrop,” Klopfenstein said. “And as long as that is the case, gold will be well supported. I don’t expect a major drop below $1,350.”

Spencer Patton, president and founder of Steel Vine Investments, also doesn’t see the European debt situation going away anytime soon. “There’s never been an unsuccessful auction in the past, but rates are still too high to be sustainable. Even in countries that got bailed out, auctions are successful, but rates are unsustainable to float debt,” Patton said.

Charles Nedoss, senior market strategist with Olympus Futures, looks for gold to bounce next week on technical-chart factors, since the market is range-bound but currently closer to support underneath the market than the resistance above. Furthermore, he said the dollar index looks technically negative, and further declines would be supportive for gold.

February gold has been turned back lately from chart resistance at the 10-, 20- and 50-day moving averages, which all lie roughly in the area from $1,384.50 to $1,388.50, he said.

But at the same time, the metal is showing signs of holding support on the basis of a weekly chart, Nedoss said. This includes last week’s $1,352.70 low, which roughly coincides with the 20-week moving average around $1,350.

“I think we’re starting to get to the low end of the range here and start to work higher next week,” Nedoss said, although there might be a “fight” once it gets back to the daily moving averages currently in the $1,380s. “I think eventually – maybe not next week but over the course of the next couple of weeks – we’ll take those levels out and we’ll see the dollar (index) take out the 79.00 level.”

Patton is keeping an eye on a possible head-and-shoulders formation on February gold charts. He said it’s not a perfect technical chart pattern, but he points to two left shoulder tops from October and November, the head being the high from early December and the right shoulder the late-December/early-January highs.

The neckline of that asymmetrical pattern comes in around $1,360. If that is broken, Patton said prices could fall to $1,300. Beneath that level trendline support is at $1,280.

Those would be good buying opportunities, if prices fell that far, and he expects buying to come in if a break like that occurred.

Silver’s short-term outlook is a little more tenuous, he said.  Currently it’s holding above chart support around the $28.20 to $28 area.

“I’m more concerned about silver than I am about gold. The charts seem to suggest a topping pattern – maybe it’s a window into gold,” he said.

Patton said support for silver does not come in until around $25, a level where it broke out of resistance. That means silver could fall further if downward momentum were to pick up. Trendline support comes in at $21. “Silver is more volatile than gold and it could fall another 10% - I think it could test $25,” he said. “If it does, it would be a good buying opportunity.”

By Allen Sykora and Debbie Carlson of Kitco News asykora@kitco.com dcarlson@kitco.com

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