As gold price closes in on $2,000, is there a ‘mystery buyer’?

Earlier this week, investors saw the price of gold hit an all-time high of £1,570.41 an ounce by the close of the day, with the upward trend continuing for now.

The dollar price at around $1,911 is still far from the all-time high of $2,075, but has also made gains recently.

Many investors keep a close eye on gold’s buying opportunities and view the precious metal as a storehouse of wealth and protection against inflation, a convenient way to diversify a portfolio, and a safe haven during financial and political turmoil.

Recent movements in the gold price have led to speculation about a “mystery buyer” whose activities in the market influence the price – presumably the Chinese or Russian central bank, or perhaps both.

But more prosaic price drivers are also likely to be at work, such as the expectation that the US Federal Reserve will soon end its series of rate hikes, and a surge in demand from Chinese households around the country’s New Year celebrations.

We look at recent trends in the gold market and predictions from financial experts on how they could develop in 2023.

>>>How to invest in gold: read our guide here

A mysterious buyer of gold? The Chinese question “seems inexorable,” says one expert

“The rise in gold prices over the past two months has defied analysts’ expectations for continued weakness,” said Daniel Ghali, senior commodity strategist at TD Securities.

“However, we see little evidence that the rise in gold prices is related to a changing macro [the economy as a whole] story.

Given the bearish macroeconomic backdrop, speculative interest in gold has remained exceptionally weak as the world heads for recession.

“Yet gold prices have continued to rise, recovering more than 50 percent of their significant decline from 2022 highs.”

Ghali says this raises the question of who in the world is the mystery buyer driving prices up, and his company’s analysis suggests that colossal Chinese and official sector purchases may have led to $150 an ounce mispricing in gold markets.

What is less clear is what drove these massive purchases. We are investigating whether there is a sanctions evasion war chest [with] a potential invasion of Taiwan, China’s reserve currency ambitions, massive pent-up demand associated with China’s reopening, or Chinese New Year’s demand could be consistent with this extreme buying activity.

“Chinese demand appears inexorable for now, but barring a major geopolitical regime change, we believe it is likely to decline to normal levels in the coming months.”

Ghali warns that this leaves the gold price vulnerable to a steep consolidation given the lack of alternative buyers and the current mispricing.

He says his firm is tracking the positioning of China’s top 10 gold traders “to look for burgeoning signs of a spike in Chinese demand,” which could be “a tactical signal for a notable price revision.”

Russia, US Fed interest rate policy and inflation

This year’s widely anticipated pivot in US interest rate policy, plus the return of Chinese household demand and strong central bank purchasing led by Russia and China, are likely to support gold’s underlying uptrend in 2023, he said. don’t stimulate,” says BullionVault director of research Adrian Ash.

Gold is already up more than $100 an ounce so far in 2023, driven in part by Chinese retailers rushing to prepare for the Lunar New Year after Beijing finally abandoned its “zero Covid” policy, but more by speculation in the future of New York and Shanghai markets.

“Speculators have seized on the talk of a ‘mystery buyer’ among central banks – most likely Russia, where the world’s second-largest gold mining industry is again locked out of global markets by international sanctions.”

Ash notes that the Central Bank of Russia purchased 80 percent of Russia’s gold mine production during the Crimean sanctions of 2014-2018.

Meanwhile, he points to expectations that the US Fed will slow rate hikes in 2023, halt and begin to reverse as inflation eases from last year’s near-double-digit peaks.

On China, Ash says: “China’s central bank gold reserves have been getting a lot of attention lately, with some analysts and pundits suspecting Beijing is underreporting its holdings, officially said to have grown above 2,000 tons on New Year’s Eve.

“However, Chinese households are much heavier buyers of gold, having bought as much gold in the form of jewels, coins and small bars in the last two and a half years and buying almost five times as much as the People’s Republic in the past ten years. Bank now says it has a total.’

Ash warns that the speed of gold’s New Year’s jump leaves it vulnerable to a quick setback, saying many BullionVault clients have taken profits at these near-record prices, but are ready to bounce back when prices fall.

Retailers of small bars and coins are seeing a similar pattern, and demand for gold-backed exchange-traded trust funds (ETFs) has turned negative as long-term investors look for a cheaper entry point.

“That strategy should help limit the depth of a pullback as well as the underlying strength in global consumer demand, led by Chinese and Indian households.”

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Two decades of gold prices in dollars

What usually drives the gold price?

Rate cuts or quantitative easing – printing money – particularly in the US, make gold more attractive to investors as it weakens the dollar and could fuel inflation.

The US Federal Reserve has raised interest rates to curb inflation, but is expected to change course once it is under control later in 2023.

The demand for ‘physical gold’, including coins and bars, can be determined by several factors. For example, the festival of Diwali is a popular time to buy gold jewelry in India, as is the Lunar New Year in China (the year of the rabbit begins on January 22) for all types of physical gold.

Chinese households are generally major buyers of gold, even more so than the central bank, says BullionVault’s Adrian Ash.

Accounting for one in every five ounces of gold sold globally over the past decade, the gold added to China’s household stock in cash since 2013 equates to 0.33 percent of the country’s GDP, a huge figure compared to the 0.06 percent spent on gold by American or British consumers.”

But even when demand for coins, bars and jewelry is high, it can be offset by volatility in “paper gold,” in the form of exchange-traded funds held by institutional players such as banks and hedge funds.

Meanwhile, as we’ve seen recently, a strong dollar makes gold more expensive and can put off buyers of all types.

And because the dollar, like gold, is considered a safe haven in times of distress, making it stronger, these two trading trends sometimes work against each other.