Could China be the mystery buyer driving up price of gold for investors? 

Gold prices are hovering near all-time highs as demand remains robust despite rising interest rates that make other assets, such as bonds, more attractive.

Recent market trends have fueled speculation that even at today’s high prices, gold is being quietly stockpiled by central banks in China and Russia.

The gold price in sterling reached an all-time high of £1,653 in early May.

The current dollar high of $2,075 was briefly surpassed — albeit unofficially — on the same day as market observers put that short shift down to futures and options trading rather than physical deals.

Prices in pounds and dollars have since dropped to £1,568 and $1,967. However, financial experts believe that these prices are about to rise if another financial crisis erupts, or if there are signs that the US Federal Reserve is about to ease interest rate hikes.

Investors who keep a close eye on gold’s buying opportunities 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.

Promptly dispels rumors of a mysterious buyer

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

Some gold purchases remain unexplained and while it is conjecture, it appears that the central banks of China and Russia have been on a bargain hunt, said Adrian Ash, director of research at marketplace exchange BullionVault.

“It has to go somewhere and whoever buys it gets it off the market at a high price,” he says. “These countries are the obvious suspects because of their size and their history of gold acquisition.”

Usually, high US interest rates make investors prefer to put money in government bonds, which generate income, while gold does not. This time, however, the gold price has remained high, says Ash.

The natural link between gold and interest rates seems to have weakened, if not broken. The difference is gold’s political appeal as an asset over which Washington has no control.’

Ash notes that when the US imposes sanctions on a country, it can no longer clear dollars through the New York financial system, adding, “In extremis, gold is the ultimate form of payment.

Gold prices remain high by historical standards, and while the precious metal has lost the $2,000 level for now, the underlying price remains very firm, supported by Asian consumer demand and central bank buying.

“The fact that prices are so high in the absence of strong demand for investment suggests that there is a lot of room for gold to rise sharply the next time financial markets get into trouble.”

Financial experts believe that the price of gold will rise if another financial crisis comes, or if there are signs that the US Federal Reserve is about to ease interest rate hikes

Price sensitive to fluctuations in financial markets

Gold has recently brought diversification benefits to investors who own it, says Bestinvest CEO Jason Hollands.

Because while US Treasury yields have risen dramatically higher – due to aggressive rate hikes – gold offers no income payments.

“While other investments such as bonds or stocks offer investors coupons or dividends, gold has no returns. It’s a static asset,’ he says.

Hollands attributes the strength of gold to factors such as problems in the banking sector and the recent US debt ceiling crisis – and, as suggested by Ash, central bank purchases by the likes of China.

He says: “One of the biggest factors behind gold’s recent strength is that central banks (and sovereign wealth funds), particularly from emerging countries, have been big buyers of the precious metal for their reserves over the past year.

Their motivation is likely influenced by the way the US and its allies, in response to last year’s Russian invasion of Ukraine, weaponized the dollar by freezing Russia’s foreign exchange reserves abroad.

“Physical gold held in domestic vaults is much more difficult for foreign powers to act against. Countries that may be concerned about the risk of being hit by similar actions in the future are certainly taking note.

“At the end of the day, a gold bar is worth what the next one is willing to pay for it. While that may be driven by real-world demand sources such as the jewelry market, central bank purchases, and its use as part of electronic items, a significant influence on the gold price comes from financial markets, which are prone to sharp swings in sentiment. ‘

The prospects for gold are still sparkling

“While the near-term outlook for gold remains a bit unclear, there is little doubt that the longer-term outlook is positive,” said Fawad Razaqzada, market analyst at StoneX.

There has been a bit of aggressive pricing in US interest rates lately, but the higher interest rates go, the sharper the eventual economic slowdown is likely to be.

‘The interest rate is therefore going to fall again and perhaps more strongly than it seems now.’

Razaqzada says recent Chinese and European data also point to falling interest rates. And economic crises and inflation in emerging markets like Argentina, Turkey and Pakistan will only increase gold’s appeal.