Gold may have seen its lows of the year this month, but the path forward is murkier given the strange correlations it has had recently with the rising U.S. dollar and bonds.
Gold futures for December were trading above $1,250 per ounce Tuesday. Gold hit a low of $1,182 per troy ounce, in its first break below $1,200 since December.
"It started as a hedge against lower stocks and has gained traction with lower interest rates," said George Gero of RBC. "The dollar hasn't really moved much. It's interesting because both gold and the dollar are safe havens, and I think it's surprising and confusing many traders." Gero said the move above $1,250 overnight was important, and he now expects gold to reach $1,300 by year end.
Gold hit its year high of $1,391.4 on March 17 and fell to its low of the year on Oct. 6.
TD Securities strategists said gold has reversed its bear trend, and the short term outlook is bullish with gold possibly extending to the $1280/1290 level.
Jim Steel, chief commodities analyst at HSBC, however, does not see much upside for the metal. He said gold buying was stimulated in part by gains in palladium and platinum Tuesday.
"I think the market has decent physical demand which was stimulated when it was near $1,200," he said. "I do think gold is a bit thin, and the likelihood that the dollar is overall stronger is going to kind of keep a lid on gold. Also, the repeated lack of inflationary pressure. That doesn't bode well for gold to make a significant rally." Steel said he expects an average price for the year of $1,265.
"I think the drop in the equity market did help save gold. Equities are stabilizing a bit, and that'll take some of the near-term oxygen away from the market," he said.
The rising dollar is one thing, but the recent strength in Treasurys is also an odd correlation for strengthening gold since gold is seen as a hedge against inflation and the Treasury market is reacting to low inflation. Yields at the long end of the curve were higher Tuesday, while buyers drove yields at the shorter end lower.
"There is a duel between them in that sense," said Steel. "There were some periods where the fright of the crisis was so severe and investors went into gold and bonds simultaneously." But that correlation doesn't last long, and Steel said the strengthening dollar will be a challenge for gold.
The euro is another story. It was trading lower Tuesday at $1.274, as speculation about more European Central Bank easing circulated.
Dennis Gartman, publisher of The Gartman Letter, said gold may not be that attractive or have much upside against the dollar but it does look promising against the euro, as it aims at the 985-euro-per-ounce level.
"A stronger dollar is always deleterious to stronger gold, but perhaps what's most important of all is you're three or four euros under a new high in gold, in euro terms," he said Tuesday morning. "I think gold is nothing more than a currency ... I don't look at it as an inflation hedge anymore."
Cross currents in the markets have been exaggerated by the fact that the Fed is moving away from quantitative easing as the European Central Bank moves closer to it. The ECB began buying covered bonds this week and was reported to be considering buying corporate debt in its battle to improve the euro zone economy and turn back deflation.
While the Fed is not close to raising interest rates yet, the prospect of its steps towards normalcy has created a wave of volatility through world financial markets. At the same time, traders look to easing by Europe's central bank and others, like the Bank of Japan.
"It's archly 'A' typical for the gold market to go up with a bond market, but in the course of the past few months, that's exactly what's going on, and conversely it's odd that gold is going up as crude oil is plummeting. The real question is how is gold going to respond to other non-dollar currencies, and it is really demonstrably strong in terms of the euro," he said.
Comments earlier Tuesday from German Finance Minister Wolfgang Schaeuble that the weaker euro was helping German exporters was seen by traders as near an endorsement for ECB easing as the German official would give.
"When Schaeuble came out and said that, it was important," said Gartman.
Europeans could use gold as a hedge against a decline in their own currency. "If we start going up through 985, you have to be long gold in euro terms. That will be a breakout. That's more important to me than gold trading at $1,250 in dollar terms.... I am ambivalent gold in dollar terms," Gartman said.
Gero said the $1,250 level is meaningful for funds, however, and could act as a magnet for buyers. He said the jewelry industry, an active buyer this time of year, may increase purchases this year, because the price is more attractive. It also may offset some of the loss of demand from India.
"The dollar looks strong not because the dollar is strong, but because the euro is sinking. Low interest rates may not support the dollar for a long time," he said.
"The Russians have been buying gold to shore up their currency, and China, because of weakness, they've been doing their own version of QE, which could help gold," he said.
—By CNBC's Patti Domm.