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  • Anupam Nath / The Associated Press

    A goldsmith makes jewelry in Gauhati, India. Gold has surged 15 percent since sinking to $1,212 an ounce, its lowest level in almost three years, on June 27, 2013. A gain of 20 percent or more would put the metal back in a bull market.

  • Kamran Jebreili / The Associated Press

    10-gram gold bars with a purity of 999.9 that have been pressed and stamped with the "Emirates Gold" company logo, lie on display in Dubai, United Arab Emirates.

Gold regaining its glitter

Published: Tuesday, Sep. 3, 2013 - 12:00 am

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 drove prices up.

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 of 2013 as the outlook for the economy improved while inflation remained subdued. While the price is still down 17 percent this year, gold is on the rise.

Here are the factors driving its comeback:

A little insurance

One of the reasons people buy gold is that it offers an alternative to more traditional financial assets, says 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 changed last month.

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

Strife in Egypt and Syria has also reminded investors that it's a dangerous world: wars can spread and oil prices can spike, hurting economies and stocks.

Investors want to add back a little insurance to their portfolios these days.

Haven from currencies

The Fed appears close to reducing its $85 billion in monthly bond purchases, and that has stirred up currency prices worldwide, particularly in emerging markets. Investors had previously borrowed in dollars at low rates and then invested in faster growing economies in Asia and Latin America.

Now, that trend is reversing. U.S. interest rates have started to climb in anticipation of the Fed's reduced stimulus. Investors are selling their emerging-market holdings and converting the proceeds into dollars.

The value of the Indian rupee against the dollar plunged more than 11 percent in August on concerns that high oil prices are pushing the country into economic crisis. The Indonesian rupiah also slumped.

When currency markets become volatile, investors worldwide look to invest in safe assets, like gold, that will hold their value.

Jewelry buyers

Speculators like hedge funds were behind the surge in gold over the last decade. That sent gold to a peak of $1,900 an ounce in September 2011. It also priced out a large part of the market - jewelry buyers in countries like India and China who have traditionally bought jewelry as a way to invest in gold.

When prices slumped this spring, though, those buyers jumped back in.

The World Gold Council, a trade group for gold mining companies, said in a report on Aug.15 that consumer demand for gold surged 87 percent in China in the second quarter, compared with the year-ago period. Demand in India climbed 71 percent.

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Read more articles by Steve Rothwell

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