The gold price in sterling set a record high of £1,570.41 per ounce at the end of the trading day earlier this week. And the upward trend is expected to continue for the foreseeable future.
The dollar price, which is currently about $1,911, is still quite a distance from its all-time high of $2,075, although it has gained ground recently.
Gold is viewed by many investors as a store of value and a hedge against inflation. Also a tool to diversify a portfolio and a haven asset during economic and political turmoil.
Recent gold price fluctuations have inspired rumors of a “mystery buyer” whose market activities are influencing the price. This buyer is believed to be the Chinese or Russian central banks, or maybe both.
There are also likely to be more prosaic pricing drivers at play, such as predictions that the US Federal Reserve will soon halt its string of interest rate hikes and a boost in Chinese household demand around the Chinese New Year.
We examine recent gold market movements and the prognostications of financial professionals regarding how they may manifest in 2023.
A secret gold buyer? One analyst observes that Chinese demand “appears unyielding.”
According to Daniel Ghali, senior commodity strategist at TD Securities. The price increase in gold over the past two months defied analyst projections for continued weakening.
However, there is little indication that the rise in gold prices is related to a shift in the macro narrative.
Given the gloomy macro environment, speculative interest in gold has remained extraordinarily subdued as the world hurtles toward recession.
Gold prices have continued to rise, recouping more than fifty percent of their substantial decline from their 2022 peaks.
This, according to Ghali, begs the question, “Who is the mystery buyer driving up prices?”
His firm’s analysis implies that massive Chinese and government sector purchases may have produced a $150 per ounce mispricing in gold markets.
What is less evident is the motivation behind these enormous purchases. We analyze whether a sanctions-evasion war fund related to a future invasion of Taiwan, China’s reserve currency ambitions, tremendous pent-up demand associated with China’s reopening, or Chinese New Year demand could explain this unusual buying activity.
‘Chinese demand remains unyielding for the time being, but barring a major geopolitical regime shift. We expect it to return to normal levels within the next several months.’
Given the dearth of alternative purchasers and the current mispricing. Ghali cautions that this leaves gold prices susceptible to a sharp decline.
According to him, his firm is monitoring the posture of China’s top 10 gold traders “to search for nascent signals of Chinese demand peaking,” which might serve as “a tactical signal for a significant repricing lower.”
Russia, US Federal Reserve monetary policy and inflation
Adrian Ash, director of research at BullionVault, predicts that this year’s widely anticipated shift in US interest rate policy, combined with the return of Chinese household demand and strong buying among central banks led by Russia and China, will support if not boost gold’s underlying uptrend in 2023.
Gold has climbed by more than $100 per ounce so far in 2023, driven in part by Chinese shops hurrying to prepare for the Lunar New Year after Beijing abandoned its “zero Covid” policy, but more by speculation on the New York and Shanghai futures markets.
‘Speculators have latched on rumors of a “mystery buyer” among central banks – most likely Russia. Where the second-largest gold mining industry in the world is once again barred from global markets by international sanctions.’
During the Crimea sanctions of 2014 to 2018, the Central Bank of Russia purchased 80 percent of Russian gold mine output, according to Ash.
In the meantime, he cites estimates that the US Federal Reserve will halt, stop, and begin reversing interest rate hikes in 2023, as the inflation rate declines from its near double-digit heights last year.
In 2023, will a “mystery buyer” drive the price?
Regarding China, Ash states, ‘China’s central-bank gold stockpiles have received a great deal of attention recently. With some analysts and commentators speculating that Beijing is under-reporting its holdings. Which are estimated to have surpassed 2,000 tonnes as of December 31.
Chinese families have acquired approximately five times as much gold in the previous decade as the People’s Bank now claims to have in total. They have acquired this amount of gold in the form of jewelry, coins, and small bars in just over two and a half years.
Ash warns that the pace of gold’s New Year’s surge makes it susceptible to a swift reversal. And notes that many BullionVault customers have taken profits at these near-record prices. But are prepared to re-enter the market if prices fall.
The demand for gold-backed exchange-traded funds (ETFs) has turned negative as long-term investors seek a less expensive entry point.
This strategy and the underlying strength of global consumer demand, spearheaded by Chinese and Indian consumers, should minimize the extent of any downturn.
What generally influences the gold price?
In the United States, interest rate reduction or quantitative easing – the creation of money – makes gold more attractive to investors because they weaken the dollar and can feed inflation.
The Federal Reserve has been increasing interest rates to combat inflation. But is likely to reverse direction later in 2023 after inflation is under control.
The demand for “physical gold,” such as coins and bars, can be influenced by various variables. In India, the festival of Diwali is a popular time to purchase gold jewelry, while in China, the Lunar New Year (the Year of the Rabbit begins on 22 January) is a popular time to purchase all forms of physical gold.
BullionVault’s Adrian Ash notes that Chinese households are large buyers of gold in general. Much more so than the country’s central bank.
In cash terms, the gold added to China’s household stockpiles since 2013 represents 0.33 percent of the country’s gross domestic product, a staggering amount compared to the 0.06 percent spent on gold by U.S. and U.K. consumers.
Even when demand for coins, bars, and jewelry is high, it can be negated by the volatility of “paper gold” owned by institutional actors such as banks and hedge funds in the form of exchange-traded funds.
In the meantime, a strong dollar, as observed in recent times, makes gold more expensive. Which can deter all types of consumers.
And because, like gold, the dollar is viewed as a haven in times of uncertainty, causing it to increase. These two trade tendencies can often operate against each other.
