In the previous session, gold plummeted to its lowest price in 10 months, dropping 20 percent from its all-time high above $1900 to a $1526 intraday low. Technical analysts say that low may have sparked the rally.
"Look for buying interest near 1520 to underpin a near-term uptick toward the 1600 area," Barclays analysts wrote in a note to clients Wednesday night.
Throughout the recent sell-off, gold bulls maintained the precious metal's more than decade-long rally would remain intact. Gold has gained a stunning 409 percent in the past 10 years.
Another factor in the gold reversal may be a change in investor sentiment. Ongoing concerns about the economy seemed to have rekindled a flight to safety in gold, traders say.
"There has been a reevaluation of gold now. There's a cautious flight to quality that's attracting buyers", says gold options trader Anthony Neglia of Tower Trading NYC. Some traders may also be covering short positions, especially after a disappointing U.S. manufacturing report, some traders say.
The precious metal's stunning reversal Thursday morning came after the release of a key gauge of manufacturing activity from the
Adding to gold's "safe-haven" trade, traders say, are real signs of the contagion effect of European sovereign debt risk, as evidenced by the spread between Spanish and German bond yields trading at all-time highs.
This 24-hour shift in traders' perception of gold has been swift but not unexpected, says trader John Netto, founder of M3 Capital. "The decoupling we've seen today between gold and risk assets (including the S&P, oil and copper) is congruent with the price action that we've seen in past periods of sharp declines."
"Gold often trades with a strong correlation to risk assets during initial stages of a bear market," Netto says. "However, most gold traders also understand — as evidenced in the bear market in 2008 and a sharp pullback in equities in 2010 — that gold on a relative basis continues to greatly outperform other assets."
"The action in gold today shows the market is beginning to price in a more accommodative policy from the Federal Reserve and central bank community," Netto says. "That is why gold is rallying not only in dollars, but in British pounds and Euros as well."
Neglia also notes recent media reports that the first Japanese pension fund is now buying gold to escape sovereign risk may have encouraged more buyers to come into the gold market.
Follow Sharon on Twitter: @sharon_epperson