Gold is having a summer revival. Its price touched $1,420 an ounce this week, a three-and-a-half month high, as tensions in the Middle East, volatile currencies and renewed demand pushed prices up
Gold still remains far below its inflation-adjusted peak. It rose as high as $873 an ounce on Jan. 21, 1980. Adjusted for price increases that would be worth $2,475 in 2013.
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 rebound follows a rough ride. It slumped 4.8 percent in the first quarter as the outlook for the economy improved and 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 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 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. And 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:
Insurance: One reason people buy gold is it’s an alternative to more traditional assets, says Mike McGlone of ETF Securities. Gold because it is considered one of the safest assets that can easily be converted to cash.
As stocks soared this year, investors had less need to hold gold. That has changed in the last four weeks. The S&P 500 index has lost 4 percent since hitting an all-time high Aug. 2. Traders are concerned about when and by how much the Fed will pare back on its stimulus.
Strife in Egypt and Syria has also reminded investors that wars can spread and oil prices can spike
Investors want to add back a little insurance to their portfolios these days. “If we lived in a perfect world, we would not need gold,” says McGlone.
Safe haven: The Fed appears close to reducing its $85 billion in monthly bond purchases, and that has stirred up currency prices, particularly in emerging markets. Investors had previously borrowed in dollars at low rates and then invested in faster growing economies.
Now, that trend is reversing. U.S. interest rates have started to climb in anticipation of the Fed’s reduced stimulus. Investors are selling emerging-market holdings and converting the proceeds back into dollars.
When currency markets become volatile, investors look to invest in safe assets that will hold value, says Dan Heckman, who specializes in commodities at US Bank.
Jewelry: Speculators 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, where people have traditionally bought jewelry as a way to invest in gold.
When prices slumped this spring, though, those buyers jumped back in because people in those countries bought more.