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Gold bugs: Time for 'ugly duckling' to shine?

Tuesday, 23 Jul 2013 | 11:45 PM ET
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The recent rebound in gold prices has injected bullishness back in the market, as gold bugs call for further gains in the months ahead, with one analyst expecting bullion to hit $1,600 per ounce by year end.

David Lennox, resources analyst at equity research firm Fat Prophets, told CNBC he's not ruling out another 20 percent upside for gold by December, as the expected robust recovery in the U.S. economy remains elusive.

"We do think that the factors that did push gold towards those record levels are still in the market," Lennox said on CNBC Asia's "Squawk Box." "[U.S. economic] growth is mediocre and... we think that growth is going to stay mediocre for some time."

(Read more: Dennis Gartman: Gold is going 'several hundred dollars higher')

Weakness in the U.S. economy will require the U.S. Federal Reserve to keep its aggressive quantitative easing (QE) program for longer than what the markets are expecting, Lennox said.

"That's going to be good for gold," Lennox said. "All we've got to do is see the speculative end of the market again become convinced that perhaps the Fed is not going to ease QE and they'll pile back in."

Axel Merk, president and chief investment officer at Merk Investments, said the toning down of tapering talk by Federal Reserve chief Ben Bernanke would help drive the price of gold higher after the rout seen earlier this year.

(Read more: Bernanke: Too early to tell when tapering will start)

Last week, Bernanke reassured markets that the U.S. central bank will stay flexible on its timing of the winding down of its $85 billion per month bond buying program, and would only do so when the economy is strong enough.

"Until just a few weeks ago, pundits fell all over themselves to call an end of the gold bull market," Merk said in a note on Tuesday. "As monetary policy appears on a more accommodative path than a couple of weeks ago when "exit" and "taper" talk was all the rage, it's the ugly duckling [gold] that gets to shine."

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Gold snapped a four-day winning streak on Wednesday after hitting a month one high a day earlier, to trade around the $1,340 handle.

The precious metal has fallen 20 percent so far this year, with sharp declines seen since April when news of troubled euro zone member Cyprus selling gold reserves triggered a massive selloff. Talk of the Fed tapering in May also took a toll, pushing gold prices into bear market territory.

(Read more: Has gold entered a long term bear market?)

But since slumping to an almost three-year low of $1,180.71 in late June, gold is up almost 14 percent, and Merk says this could be due to the monetary easing in Japan as well as markets not being convinced of a strong economic recovery in the United States.

"A key reason why gold may be moving higher may well be that the market doesn't believe in the sustainability of the housing recovery [in the U.S.]," Merk said. "With regard to housing, we think Bernanke may soon find the glass to be half empty, encouraging him to err on the dovish side, a likely positive for the price of gold."

On Monday, data showed that U.S. home resales unexpectedly fell 1.2 percent in June after two straight months of hefty increases, Reuters reported.

—By CNBC.com's Rajeshni Naidu-Ghelani; Follow her onTwitter @RajeshniNaidu

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