Then, towards the end of the year, something happened. The gold price started rising quite sharply and, with some volatility last year during a period when the markets were pricing in as many as six US rate cuts this year, has continued to rise ever since.

In the months after Russia’s invasion the G7 group of countries, led by the US, began imposing an ever-increasing range of sanctions on Russia.

The most important, and controversial, of them was the freezing of about $US323 billion ($487.3 billion) of Russia’s foreign exchange reserves held offshore.

Russia was also booted out of the SWIFT financial messaging system that underpins the global financial system.

In the September quarter of 2022, central banks bought 399 tonnes of gold. The previous quarterly record was 241 tonnes in the same quarter of 2018.

Their purchases in the 2022 full year and last year, both above 1000 tonnes, were also records and their net purchases of 290 tonnes in the first quarter of this year were the highest on record for any March quarter.

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It’s countries like China (which has been increasing its purchases of gold every month for nearly 18 months), India and Turkey that have led the central banks’ buying, although there’s also been buying out of the Middle East and Eastern Europe. China’s official reserves (it’s thought to have some “off the books” reserves) of 2262 tonnes are about 16 per cent higher than in late 2022.

It is obvious why central bankers have decided they need more gold. Having seen what happened to Russia, they want less exposure to the US dollar and the dollar-denominated financial system to limit, if not entirely avoid, their vulnerabilities to sanctions.

China, which held $US1.3 trillion of US treasury securities a decade ago and $US1.1 trillion only three years ago, now holds “only” $US775 billion. It sold $US22.7 billion of its Treasury bonds in February, so it has continued to wind down its exposure to that market even as it has built its gold reserves.

Its official holdings amount to about 2262 tonnes of gold, or 4.6 per cent of its total reserves. In late 2022 gold represented 3.2 per cent of its total reserves.

So, central bankers are demonstrating natural caution and diversifying to some extent their foreign exchange reserves to reduce the potency of any future sanctions.

For China in particular, whose companies and individuals are already subject to a range of US sanctions on issues ranging from its support for Russia’s war effort, its treatment of the Uighurs to the anti-democracy crackdowns in Hong Kong, and efforts by the US to stifle its technology ambitions, the prospect of a seizure of its foreign reserves must feel very real.

The increasingly aggressive language Xi Jinping uses in reference to his determination to annex Taiwan and China’s increasingly aggressive actions in the South China Sea point to near-term potential flashpoints that could see its offshore reserves targeted.

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Its ambitions for Taiwan may not have been the primary reason China embarked on its gold buying spree – in the wake of Russia’s experience it would have appeared to be just sensible derisking of its reserves – but it would have been a factor.

It’s not just the People’s Bank of China that has ramped up its purchases. Chinese consumers have also become a very significant source of buying. They accounted for about 309 tonnes of the gold purchased in the March quarter, about six per cent higher than in the same quarter last year.

With the value of the primary source of household wealth – property – decimated by the implosion of China’s property sector, a sharemarket that, despite a recent sharp rebound, is still nearly 40 per cent below a peak reached more than three years ago and stringent capital controls, China’s citizens don’t have many attractive options to invest.

Despite the record level at which gold traded last month – made more expensive for because of the US dollar’s strength – China’s investors have piled into gold and gold exchange-traded funds. Its big online retailers are selling gold “beans”, or fractions of an ounce, to China’s youth.

Central banks other than the US and its closer allies are likely to continue to try to diversify their holdings away from the US bond market and the dollar, even though the US Treasury market will, because of the sheer size and depth of that market and the continuing primacy of the dollar in global finance and trade, remain a core repository.

No other market, not even the market for gold, is big enough, or has the market infrastructure and legal and regulatory safeguards – and, unlike the yuan, a free-floating currency and no material capital controls – to absorb the wholesale retreat from the US dollar assets that some central bankers might dream about.

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