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Gold seen as less bad this year, but lows are still ahead

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Despite bearish calls for gold, some analysts see the metal's prospects as slightly less bleak this year.

"It does look like the increase in short positions on the Comex has sort of halted," said Jim Steel, chief commodities analyst at HSBC. "I think the continued physical demand in the Far East has also been a sort of sign for the market. Although investment demand remains weak, there's still a home for the physical side."

Traders increased net long positions in gold futures and options to 40,256 in the week of Jan. 7, the highest level since November, according to CFTC data.

February gold futures rose during Monday's stock market selloff and reached the highest level in a month early Tuesday. But they gave back some gains, slumping about half a percent to settle at $1,245.40 a troy ounce.

The strength in stocks and more comments from Fed officials on the wind down of the quantitative easing policy took its toll on the metal during U.S. trading Tuesday.

RBC analyst George Gero said another good sign for gold is this week's jump in open interest to over 400,000.

There was technical selling after Tuesday's Open Interest Report showed an increase to 410,863, he said, adding that traders sold when the $1,250 level did not hold and as stocks rose on November business inventories data.

"You have enough negatives and a lot of positives—enough to cause a whipsaw," Gero said.

Gold, down nearly 30 percent last year, could be on the verge of turning, he added, and if it can get to $1,260 or $1,270 an ounce, that would be technically positive.

"I think it's changing direction slowly, like a big ship changing direction," Gero said. "There's still too many bears in the woods—Goldman Sachs is looking for $1,050 to $1,100. That could still happen, but it seems like we're changing direction."

Gold has crept 3.5 percent higher this year, while the S&P 500 is down 0.7 percent.

Gero said the jump in open interest confirms the premise of an article in Tuesday's Wall Street Journal discussing how hedge funds such as Passport Capital, as well as other buyers, are returning to the market.

"We are moderately positive but with a wide range based on physical demand [and] emerging market demand," Steel said. "Chinese coin demand has been spectacular. … The further we go down, the more I see emerging markets reacting to lower prices. They're providing a floor which is why we don't think it will go down that much further."

Even though he sees more positives than negatives, he expects further turbulence and lower prices for the metal.

"Our range low is $1,105, so it would not surprise me to see the other shoe drop later in the first half," Steel said. "Our basic thinking is we could still see some weakness later in the first quarter or second quarter predicated on dollar strength and continued [Fed] tapering."

But it should then go higher, he said.

"I think as the year goes on and we get more climatized to tapering and the dollar finds its higher level—that constant physical demand will send the market higher again," he said, adding his high price target for the year is $1,390 in the second half and average forecast is $1,292.

But Bart Melek, head of commodities strategy at TD Securities, is more downbeat, saying the gains this year have been led by short-covering. A major index rebalancing that has created buying demand will end, he added.

Though he said gold should continue its downtrend, Melek sees it ultimately turning higher and gives the metal an average price of $1,225 this year.

It's possible gold could go as low as $1,044 this year, he said.

"My key message is while we don't absolutely hate gold," Melek said, "we do think things will get worse before they get better."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.

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