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The site that appears at number 1 for this keyword, on the other hand, has a density of 35.48%. Does 16 seems good? Should I raise or lower this number?
I'd suspect other factors are putting your competitors ahead of you; things like backward links and PageRank (have you checked your competitors PR with the toolbar? From the way I understand the situation, your own site would still not show any PR -- you're not yet in the main index, right?), link anchor text, header tags, page titles, etc. I'd recommend concentrating more on those elements, and not spending any more time tinkering with keyword density in the body text.
In any case, I wouldn't form any conclusions based on ranking until the update has settled in the main Google index.