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Gold is back on its way to $2,000 an ounce, driven by safe-haven demand - Saxo Bank

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(Kitco News) - The gold market is seeing a solid bounce from Tuesday's drop to a two-month low as the precious metal continues to outperform the broader commodity index.

In an interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that gold's three-week correction has ended and the market is on its way back to above $2,000 an ounce even as weak commodity prices signal growing recession fears.

Hansen's bullish outlook on gold comes as the Bloomberg Commodity Index has dropped 13% this year, led by silver, copper and oil. Meanwhile, gold prices are up nearly 6% this year, last trading at $1,972.70 an ounce.

Hansen said that although weak commodity prices could cool down inflation pressures in the near-term, renewed safe-haven demand remains a healthy driver for gold.

"Commodities are struggling because of the economic outlook. If the economy is as bad as commodities are pricing in, then the Federal Reserve cannot raise interest rates indefinitely," he said. "In this environment, gold prices can easily get back to $2,000 an ounce. We are not out of the woods just yet. A move back above $2,000 will definitely improve sentiment."

Although gold prices have struggled to hold gains in the last three weeks, Hansen said that the correction was inevitable. He added that gold investors were out of tune with the Federal Reserve as they were pricing in significant rate cuts by the end of the summer.

He added that gold's drop to a two-month low has put the market back in line with rate expectations; however, he also added that the idea of rate cuts before the end of the year remains a solid possibility, especially if the global economy falls into a recession.

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"If the world does fall into a recession, the Federal Reserve will quickly react and aggressively cut rates," he said. "Basically, that means that the risk-reward has once again slightly tilted back towards favoring assets that benefit from lower interest rates."

Looking to June's monetary policy meeting, markets see a more than 66% chance of a 25-basis point hike; meanwhile, markets also see interest rates falling back to 5% by the end of the year.

Along with gold's renewed upward potential, Hansen said he remains a long-term precious metal bull. He explained that while inflation continues to drop, it is unlikely to fall to the central bank's target of 2%.

He added that a fragmented world as nations develop their own domestic supply chains will keep broader commodity prices elevated over the long term. He said that elevated long-term inflation will ultimately force the Federal Reserve to raise their inflation target to 3% or 4%, which would drastically impact real interest rates, supporting a long-term rally in the precious metal.

As for the broader commodity index, Hansen said that while prices have room to go lower, investors might want to start looking at bargain hunting at these levels. He pointed out that oil prices below $70 are not sustainable for the long-term.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.