Gold prices arrested this week's slide on Friday to rise nearly 1 percent ahead of a speech from Federal Reserve chairman Ben Bernanke in Jackson Hole, Wyoming, later, which will be closely watched for hints on the outlook for Fed monetary policy.
The metal is still set for its first weekly loss in eight, however, as investors took profits after its surge to record highs at $1,911.46 on Tuesday. Volatility spiked, with prices sliding more than $200 from that level by Thursday.
They have since recovered, with spot gold up 1 percent at $1,786.86 an ounce at 5:21 a.m. EDT.
Volatility... is some 65 percent higher than the 2010 average, said Ole Hansen, senior manager at Saxo Bank. That tells us that despite the uptrend being firmly intact, we have to expect violent corrections as we move along.
Weak speculative longs has now been washed out, and the market is settling down for Bernanke. QE3 or no QE3, it does not alter the near-term dire prospects for economic activity and worries about the health of the banking sector and government debt.
Bernanke's speech will be widely watched by financial markets hoping for some indication the U.S. central bank is prepared to step in to support an economic recovery.
He is seen as unlikely to announce a third round of Fed bond buying, or quantitative easing. The Fed has already bought $2.3 trillion in longer-term securities.
Saxo Bank's Hansen said while the market could correct further if no more quantitative easing is announced, he does not expect gold to fall below $1,700 an ounce.
That the recent sell-off reflected some scaling back of QE3 expectations suggests that gold's reaction to potential disappointment today may be less severe, said UBS in a note.
While we think that the bulk of the selling is done, the fragility of investor sentiment toward gold at the moment and the bounce of the past 12 hours could mean that gold will suffer further losses, albeit more minor than in recent days.
U.S. gold futures for August delivery were up $26.40 an ounce at $1,789.60.
STOCKS MARKETS RETREAT
On the wider markets, European shares slipped on Friday, while the euro firmed a touch versus the dollar and industrial commodities like oil and copper eased. German government bonds held steady ahead of Bernanke's speech.
Outflows from the world's largest gold-backed exchange-traded funds also dried up on Thursday, with its holdings remaining at 1,232.3 tonnes. It is still on track to post an outflow of nearly 60 tonnes this week, however.
Now that short-term traders (have) booked profits in gold futures and ETFs, there are also physical buyers who moved in on the latest rally and who will choose to hold onto their longs, said VTB Capital in a note.
Among other precious metals, silver prices retreated 0.5 percent to $40.80 an ounce.
The metal failed to post its usual stellar gains on the back of gold's latest rally, as investors burned by its sharp price correction earlier this year -- when it plunged more than 30 percent in less than a week -- remain cautious.
The gold:silver ratio, representing the number of silver ounces needed to buy an ounce of gold, stood at around 43 on Friday, well above the level around 30 it traded near in April when both metals hit record highs.
Meanwhile, spot platinum was up 0.4 percent at $1,818.45 an ounce, and spot palladium was down 0.5 percent at $742.88 an ounce.