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September 1, 2013

Why gold is making another comeback

NORMAN — Gold is having a summer revival. The price of gold touched $1,420 an ounce last week, a three-and-a-half month high, as escalating tensions in the Middle East, volatile currency markets and renewed demand for jewelry in China and India pushed prices higher.

Gold has surged 15 percent since sinking to $1,212 an ounce, its lowest level in almost three years, on June 27. A gain of 20 percent or more would put the metal back in a bull market.

Gold’s resurgence follows a rough ride this year. Gold slumped 4.8 percent in the first three months this year as the outlook for the economy improved while inflation remained subdued.

For many years prior to that, large investors bought the metal as a way to protect their investments against rising prices and a slumping dollar. They feared that the Federal Reserve’s stimulus program could cause prices to rise. But inflation remained subdued and that reduced the need to buy gold.

Then in April, the bottom fell out. A proposal that Cyprus sell some of its gold reserves to support its banks rattled traders, prompting concern that Spain, Italy and other weak European economies might also sell and flood the market.

Gold plunged by $140 an ounce, or 9 percent, on April 15 as investors unloaded their holdings.

While the price of gold is still down 17 percent this year, the metal is on the rise.

Here are the factors driving its comeback:

One of the reasons people buy gold is that it offers an alternative to more traditional financial assets, said Mike McGlone, director of research at ETF Securities, a provider of commodity-based exchange-traded funds. When financial markets get jittery, investors often buy gold because it is considered one of the safest assets that can easily be converted to cash.

As the stock market soared this year, rising as much as 20 percent, investors had less need to hold gold. That has changed the last four weeks.

The Standard & Poor’s 500 index has lost 4 percent since reaching an all-time high of 1,709.67 on August 2. Traders are concerned about when and by how much the Fed will pare back on its stimulus, a major driver behind the market’s rally.

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