Can Gold Reach $1900?

The XAU/USD pair demonstrates strong volatility this week, which indicates the continuing uncertainty in the financial markets. Nevertheless, most experts are still optimistic about the prospects for the precious metals market, expecting gold quotes to climb back above the $1850 mark.

It's worth noting that gold has always been viewed as a hedge against inflationary risks. Today, such risks are especially relevant, given that the uptrend in inflation is currently observed everywhere. Producer prices in China rose at their fastest pace in 3.5 years in April. The Producer Price Index added 6.8%  last month compared to the same period last year. Since the data on the producer price index is a leading indicator of inflation, the Chinese economy risks facing more inflationary pressure in the coming months. The situation in the United States is similar. The US authorities' unprecedented monetary stimulus to combat the fallout from the COVID-19 pandemic has boosted the money supply by more than $ 5 trillion. Such massive liquidity injections did not go unnoticed. The inflation rate in the US has been rising for eight consecutive months and exceeded 3% at the end of April. Core inflation is also on the rise. In April, the core CPI exceeded the 2% target.

Market participants are concerned that a sharp increase in inflationary pressure in the US could force the Fed to start tightening its monetary policy. However, such a scenario is rather unlikely. At the last Fed meeting 2 weeks ago, Fed Chair Jerome Powell reiterated its plans to "to leave rates near zero through 2023." Against this background, the persisting uptrend in inflation is likely to keep driving the dollar selloff, which in turn will provide additional support to the gold quotes.

High demand for gold from other countries is another positive factor for the XAU/USD bulls. On Monday, the World Gold Council (WGC) released its regular report, which examines gold purchases by the central banks of different countries. According to this report, gold is now actively purchased even by countries that have not previously been involved in gold purchases. Thus, Japan has increased its gold reserves to 846 tons, having bought 80.8 tons in April. Hungary, in turn, acquired 63 tons, increasing its bullion holdings by more than three times. Turkey bought 12.9 tons of precious metal, while India bought 7.5 tons. As we can see, the demand for this asset is growing, which will keep supporting further bullish dynamics in gold. That being said, we recommend maintaining long positions in gold with the target at $1900.