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

Investors saw the gold price in sterling hit a record end-of-day high of £1,570.41 an ounce earlier this week, with the uptrend forecast to continue for now.

The dollar price at around $1,911 is still some way off its record of $2,075, but has also made gains of late.

Many investors keep a close eye on gold buying opportunities, regarding the precious metal as a store of wealth and hedge against inflation, a useful way to diversify a portfolio, and a safe haven asset during financial and political upsets.

Market trends: Gold price closes in on $2k and touches new high in sterling 

Recent gold price moves have sparked speculation about a ‘mystery buyer’ whose activities in the market are influencing the price – thought to be the Chinese or Russian central bank, or maybe both.

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

We look at recent gold market trends and predictions by financial experts of how they might play out in 2023.

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

A mystery gold buyer? Chinese demand ‘appears unrelenting’, says one expert

‘The rally in gold prices over the past two months has defied analyst expectations for continued weakness,’ says Daniel Ghali, senior commodity strategist at TD Securities.

‘Yet, we see little evidence that the rise in gold prices is associated with a changing macro [the economy as a whole] narrative.

‘Given the bearish macro backdrop, speculative interest in gold has remained exceptionally lacklustre as the world barrels towards a recession.

Why is the gold price in pounds doing better than in dollars?

In spot trade – meaning live prices – the all-time high is above £1,580 in pounds.

This level was reached during summer’s 2020’s Covid crisis, in March 2022 after Russia’s invasion of Ukraine, and in September on the disastrous ‘mini-Budget’ crash in sterling and UK government bond prices, explains Adrian Ash of BullionVault.

Last year’s strength in the US dollar and the underlying drop in the value of sterling played a big part in this price trend, he says.

But Ash adds: ‘As a barometer of economic and financial stress, the gold price says the UK isn’t alone in facing a tough year in 2023.

‘Gold for US, Euro and Japanese [JPY] investors also hit or touched all-time highs in the last 12 months, and it’s holding very strong in all major currencies including the Chinese yuan [CNY] right now.’

‘Still, gold prices have continued to firm, retracing more than 50 per cent of their significant drawdown from 2022 highs.’

Ghali says this begs the question of who in the world is the mystery buyer driving prices higher, and his firm’s analysis suggests behemoth Chinese and official sector purchases may have caused a $150 per ounce mispricing in gold markets.

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

‘Chinese demand appears unrelenting for the time being, but barring a grandiose geopolitical regime change, we find that it would likely subside towards normal levels in coming months.’

Ghali warns this leaves gold prices vulnerable to a steep consolidation lower, given a lack of alternative buyers and current mispricing.

He says his firm is tracking the positioning of China’s top 10 gold traders ‘to scour for nascent signs of peaking Chinese demand’, which could present ‘a tactical signal for a noteworthy repricing lower’.

Russia, US Fed interest rate policy and inflation

‘This year’s widely-expected pivot in US interest rate policy, plus the return of Chinese household demand and strong buying among central banks led by Russia and China, is likely to support if not boost gold’s underlying uptrend in 2023,’ says BullionVault director of research Adrian Ash.

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

‘Speculators have seized on 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 bought 80 per cent of Russian gold-mine output during the Crimea sanctions of 2014-2018.

Adrian Ash: Chinese households are heavier buyers of gold than the country’s central bank

Meanwhile, he points to expectations the US Fed will slow, stop and start reversing interest rate hikes in 2023 as the inflation rate eases from last year’s near double-digit peaks.

Regarding China, Ash says: ‘China’s central-bank gold reserves have got a lot of attention lately, with some analysts and pundits guessing that Beijing is under-reporting its holdings, officially said to have grown above 2,000 tonnes by New Year’s Eve.

‘Chinese households, however, are far heavier gold buyers, acquiring that much gold in the form of jewellery, coins and small bars in just the last two and a half years, and buying almost five times as much over the last decade as the People’s Bank now says it holds in total.’

Ash cautions that the speed of gold’s New Year jump makes it vulnerable to a swift setback, and says many BullionVault customers have been taking profit at these near-record prices but are ready to come back in should prices fall.

‘Small-bar and coin retailers 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 point to enter.

‘That strategy should help limit the depth of any pullback, as will the underlying strength in global consumer demand, led by Chinese and Indian households.’

>> Get gold, it could brighten your portfolio in 2023, says Jeff Prestridge 

Two decades of gold prices in dollars

Source: BullionVault

What typically drives the gold price?

Interest rate cuts, or quantitative easing – money printing – particularly in the US, make gold more attractive to investors as this weakens the dollar and can fuel inflation.

The US Federal Reserve has been raising rates to bear down on inflation, but is expected to change course once it is under control later in 2023.

Demand for ‘physical gold’, including coins and bars, can be driven by different factors. For example, the festival of Diwali is a popular time to buy gold jewellery in India, and so is the Lunar New Year in China (the Year of the Rabbit starts on 22 January) for all types of physical gold.

Chinese households are significant buyers of gold in general, even more so than its central bank, says Adrian Ash of BullionVault.

‘Accounting for one in every five ounces of gold sold worldwide over the last decade, in cash terms the gold added to China’s household stockpile since 2013 equates to 0.33 per cent of the country’s GDP, a huge figure compared to the 0.06 per cent spent on gold by US or UK consumers.’

But even when demand for coins, bars and jewellery is strong, it can be offset by volatility in ‘paper gold’, in the form of exchange-traded funds, held by institutional players like banks and hedge funds.

Meanwhile, a strong dollar as we have seen recently makes gold more expensive and this can deter all types of buyers.

And as, like gold, the dollar is considered a safe haven in times of trouble, which causes it to strengthen, these two trading trends sometimes work against each other.