China's gold purchases are so awesome, causing a gold paradigm shift?

What determines the price of gold? For much of the past decade, the answer was simple: the price of money. The lower the interest rate, the higher the price of gold, and vice versa.

Gold is the quintessential "anti-dollar currency", the first choice of those who distrust fiat currencies. So in a world of low real interest rates and cheap dollars, the price of gold naturally rises. Or, when interest rates rise, unyielding gold naturally loses its appeal, causing prices to plummet.

It's different now.

Gold and silver have barely blinked, even as inflation-adjusted interest rates have surged this year to their highest since the financial crisis. Real yields, as measured by 10-year Treasury inflation-protected bonds (TIPS), surged again on Thursday to their highest since 2009, while spot gold fell just 0.5 per cent on the same day. The last time real interest rates were this high, gold prices were about half what they are now.

The breakdown of the relationship between gold and real interest rates could be a paradigm shift for precious metals, leaving investors struggling to calculate gold's "fair value" in a world where the old formula does not seem to apply. It also raises questions about whether and when the old paradigm will return, or whether it has, simply on a new basis.

So, what is driving up the price of gold?

Analysts pointed out that the Chinese-led central bank has been buying gold aggressively, and investors are still betting that the US economic slowdown will benefit gold, despite the conventional investment strategy that it is time to sell gold.

Marco Hochst, portfolio manager at Berenberg, said: "Our model tells us that gold is now priced atA hefty $200However, the company's 319 million euro ($340 million) multi-asset balance fund, which he helps manage, still holds about 7 per cent of its gold assets. "We think the future looks more attractive for gold," he said.

There are various models or calculations to assess the fair value of gold, with many analysts creating their own. But by their very nature, most reflect the basic trading principles of gold and silver compared to actual US bond yields and the dollar. Typically, when the dollar strengthens and interest payments on other safe assets such as bonds and cash rise, money managers dump safe haven metals.

But this time their sell-off did not reach the expected scale, which resulted in a decrease in trading volume compared to what the model showedHuge "premium"Anthony Saglimbene, chief market strategist at Ameriprise Financial Inc., said: "Gold has no gains, but cash has gains. Where do I go from here? In this regard, I am surprised by the resilience of gold".

The "premium" has been in place for more than a year as a record buying spree by central banks has helped gold weather a tightening of global monetary policy, with some tentative signs that central bank demand is starting to slow, making gold more vulnerable to downward pressure.The key to the outlook is whether institutional investors decide to sell if prices test new lows.

However,someIndustrial foreign exchangeAnalysts believe that the relationship between gold and its key drivers has not entirely broken down, but has simply been reset on a higher basis.

Macquarie's Marcus Garvey believes gold prices will hit record highs if yields or the dollar fall again, predicting prices will rise to $2,100 an ounce next year as the US economy slows.

"There has been some sort of breakthrough rally in nominal gold prices," Mr. Garvey said. "Once you get the flow of money, I think it will be significantly higher."

The turmoil that engulfed the US financial sector in March, when Silicon Valley banks were on the verge of bankruptcy and real yields and the dollar fell, triggering fresh inflows into gold-backed exchange-traded funds (ETFs), could be a litmus test. Although gold was already trading at a high premium, it rebounded to near the record set during the COVID-19 pandemic, before eventually slipping as the crisis eased and investors sold on rallies.

Others are sceptical that gold can repeat this, especially as the threat of a banking crisis has receded and bonds have offered decent yields for the first time in years. Because gold looks relatively expensive, it will struggle to attract large inflows even in a slowing US economy.

Marco Piersimoni, co-manager of the Pictet Multi Asset Global Opportunities fund, which runs the euro 6.20 billion, said: "There are other assets, such as long-term bonds, that can be used in portfolios to serve the same purpose as gold, but with spreads. Gold is not a very convincing diversification in the current environment." He has halved his allocation to gold in the past 12 months.