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Why gold is making a comeback

Gold is having a summer revival.

The price of gold touched $1,420 an ounce this 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 of 2013 as the outlook for the economy improved while inflation remained subdued.

For many years prior to that, large investors, such as hedge funds, 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. Also, signs in January that the dollar was strengthening diminished the appeal of owning 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. That was the biggest one-day decline in more than 30 years.

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