The gold price is hovering at near all-time highs as demand remains robust despite rising interest rates making other assets such as bonds more attractive.
Recent market trends have fuelled speculation that even at current elevated prices, gold is being quietly stockpiled by central banks in China and Russia.
The gold price in sterling hit a record high of £1,653 at the start of May.
The current dollar record of $2,075 was briefly topped the same day – although unofficially – as market watchers put that brief move down to futures and options trading rather than physical deals.
Sterling and dollar prices have since slipped to £1,568 and $1,967. However, financial experts believe these prices are poised to head higher if there is another financial crisis, or there are signs the US Federal Reserve is about to ease off on interest rates hikes.
Secret: The Chinese central bank could be behind gold-buying spree that has seen its sterling price hit a record high of £1,653 at the start of May
Investors who keep a close eye on gold buying opportunities regard 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 unrest.
Moves prompt rumours of a mystery buyer
For months, 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 both.
Some gold purchasing remains unaccounted for and although it is conjecture, it looks like China and Russia’s central banks have been on a buying spree, according to Adrian Ash, director of research at marketplace exchange BullionVault.
‘It’s got to be going to somewhere and whoever is buying it is taking it off the market at a high price,’ he says. ‘These countries are the obvious suspects because of their size and their history of acquisition of gold.’
Usually high US interest rates mean investors prefer to put money into its Treasury bonds, which generate an income while gold does not. This time, however, the gold price has remained high, Ash says.
‘The natural link between gold and interest rates appears to have weakened if not broken. The difference is gold’s political appeal as an asset outside Washington’s 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 historic standards, and while the precious metal has lost the $2,000 level for now, the underlying price continues to hold very firm, supported by Asian consumer demand as well as by central bank purchases.
‘The fact that prices are this high in the absence of heavy investment demand suggests there is lots of scope for gold to rise sharply when financial markets next hit trouble.’
Financial experts believe gold prices are poised to head higher if there is another financial crisis, or there are signs the US Federal Reserve is about to ease off on interest rates hikes
Price prone to swings in financial markets
Gold has recently delivered diversification benefits to investors who own it, says Bestinvest managing director Jason Hollands.
For while yields on US treasuries have climbed dramatically higher – reflecting aggressive rate rises – gold offers no income payments.
‘Whereas with other investments such as bonds or shares there are coupons, or dividends, for investors, with gold there is no such return. It is a static commodity,’ he says.
Hollands puts gold’s strength down to factors including problems in the banking sector and the recent US debt ceiling crisis – and, as suggested by Ash, central bank purchases by China and others.
He says: ‘One of the biggest factors behind gold’s recent strength is that central banks (and sovereign wealth funds), particularly from emerging market countries, have been heavy buyers of the precious metal for their reserves over the last year.
‘Their motivation is likely influenced by the way that in response to Russia’s invasion of Ukraine last year, the US and its allies have weaponised the dollar by freezing Russia’s foreign currency reserves held overseas.
‘Physical gold held in domestic vaults is much harder for foreign powers to move against. Nations that might be concerned about the risk of being hit by similar actions in the future are surely taking note.
‘Ultimately a gold bar is worth what the next person is prepared to pay for it. While that can be driven by real world sources of demand such as the jewellery market, central bank buying and its use as a component in electronic items, a significant influence on gold prices comes from the financial markets which are prone to sharp swings in sentiment.’
Outlook for gold is still sparkling
‘While the short-term gold outlook remains a little unclear, there is little doubt that the longer-term forecast is positive,’ says Fawad Razaqzada, market analyst at StoneX.
‘There has been a bit of aggressive repricing in US interest rates of late, but the higher the interest rates go, the sharper the eventual economic slowdown is likely to be.
‘So interest rates are going to come back down and perhaps more sharply than would currently appear.’
Razaqzada says recent Chinese and European data also signal falling interest rates. And economic crises and inflation in emerging markets such as Argentina, Turkey and Pakistan will only serve to boost the appeal of gold.
This post first appeared on Dailymail.co.uk
