Gold traded slightly higher this morning in spite of a stronger dollar and growing concerns about the Euro. Spot prices topped $1685 per ounce before backing down to the $1682 level.

Gold buyers have been looking to the European Union for buy and sell indicators over the last week as fresh news from across the Atlantic has sent the dollar seesawing up and down. As concerns grow about the EU’s inability to handle the Greek situation, the dollar has shown strength in the face of a crumbling Euro, making gold weaker by comparison. This week however, there are several factors that could change that paradigm.

First, the growing sentiment among traders is that the commodities sector in general has found a bottom and is now in the process of making up lost ground. Of the 25 traders and investment professionals surveyed by Bloomberg last week, 22 stated that they were bullish going into this week, expecting prices to continue their rise. That’s the highest ratio of bulls to bears in a Bloomberg weekly survey since July 8th. It’s also worth noting that gold is now up a full 9% from last month’s lows, making up much of the ground it surrendered in the fall correction.

Second, it appears that physical demand is ramping up significantly as a reaction to lower price levels. Major institutions have taken this opportunity to buy physical gold at what was widely thought to be an oversold situation. While many traders were busy knocking down gold prices with large short positions last month, several institutions stepped in to do some bargain shopping. Central banks from Thailand, Bolivia, and several other nations added to their gold reserves, accounting for about 18.2 tons of physical gold purchases in the last 60 days.

As prices have stabilized significantly over the last two weeks, it’s likely that physical demand will remain high and will underpin the market in the $1650 range. This will significantly limit downside risk over the coming months. At the same time, we can’t forget that gold is still up over 18% on the year, while equity markets are struggling to remain in the black. You can bet that at some point the speculative money will pour back into gold now that it has established a bullish posture once more. When it does, it’s a fair assumption that we will see much higher prices very quickly.

All in all, don’t give up on $2000 gold in 2011. Gold has built a much stronger base now than it had the last time we shot above $1900 per ounce. Assuming the worst of this correction is behind us (as 22 of 25 Bloomberg survey respondents would say), gold seems well on its way to shaking off the short term bears and embarking on its next leg upward.

Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to meritprofiles@gmail.com.