Japan has been selling some of its US Treasury holdings to intervene in currency markets to prop up the yen. China has also reduced its US dollar holdings. It is possible that the developing economies most affected by dollar strength might also be sellers of dollar-denominated assets.

There is, therefore, a strong inverse correlation between gold and the US dollar and US interest rates.

Gold produces no income, so there is an opportunity cost in holding it or, if it is financed, a real and increasing cost of funding if rates are rising. The surge in the US dollar also increases the cost of buying bullion in other currencies because, again, gold is priced in US dollars.

Inflation relief, crypto carnage

The price has rebounded this month because markets have become convinced that the Fed has, if not beaten inflation, started to gain control of it. Last week’s US inflation data appears to show that inflation, while still uncomfortably high, has peaked.

The release of the data last week saw US bond yields fall back and the US dollar weaken significantly and, not surprisingly, the gold price kick up about 4 per cent. The carnage in the market for crypto assets may also have been an influence – gold and cryptos are usually seen as the prime alternatives to equities and bonds.

While the gold price was languishing through much of this year it wasn’t for a dearth of buyers.

In the nine months to September, 1181 tonnes of gold was bought, about 28 per cent more than for the same period last year.

Central banks bought 399 tonnes in the September quarter, lifting their purchases in the first nine months of this year to 673 tonnes. According to the World Gold Council, that was more than any full year since 1967. The previous record was 241 tonnes bought by central banks in the same quarter of 2018.

Maybe it was the appeal of the depressed price that caused central banks with US dollar reserves to wade in, but the surge in central bank buying might also have something to do with the war in Ukraine and the financial sanctions the US and Europeans imposed on Russia at the onset of the conflict.

In response to the invasion, the West froze more than half Russia’s $US640 billion ($946 billion) of gold and foreign exchange reserves held offshore in an unprecedented move against a member of the G20. That triggered alarm bells elsewhere.

While Russia itself has played down speculation that it might have used some of the windfall gains it has experienced from the post-invasion surge in oil prices to buy gold, it wouldn’t be in the least surprising if others saw gold as a way to reduce their potential exposure to similar actions in the future.

Obvious buyers

China and Russia don’t disclose their gold purchases, but China is an obvious potential buyer, given that it is already subject to some sanctions (over the imposition of national security laws in Hong Kong and China’s treatment of the Uighurs) that use the US dominance of global finance as leverage. Trade data suggests China has been a big buyer.

Others who did report their purchases, and which have been buying, are Turkey, Uzbekistan, Kazakhstan and India, but their buying only accounts for about a quarter of the September quarter splurge. Apart from China, and perhaps Russia, speculation about other potential buyers centres on the Middle East, particularly Saudi Arabia.

In theory, the near-record level of buying should have forced the price up earlier in the year, but it was offset by big outflows of funds from the exchange-traded funds (ETFs), hedge funds and other private financial buyers, with modest inflows and more generally net outflows of funds into the ETFs this year in response to the surge in what was, until the most recent data, a continuing escalation of inflation rates in most key economies.

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If the Fed has broken the back of US inflation, then - even though it is certain there will be another 50 basis point rise in the federal funds rate and possibly one or two more increases next year - the outlook for the gold price would have stabilised and appear more positive.

That would be good news for gold producers, which would have been getting nervous a few weeks ago as the price fell towards their “all-in” production costs and their own share prices slumped.

Gold’s status as a haven in tumultuous and inflationary times has, if it’s just price that’s the barometer, taken a beating in what has been a very volatile year for all financial assets.

The record purchases, however, would suggest that price isn’t the only metric by which that status should be measured.

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