Swiss Gold: a Friend, an Enemy, or a Problem?

The fact that Switzerland keeps around 30% of its gold and currency assets abroad, facilitates sale on more stable local markets in cases of crisis. At the same time, the demanded return of gold from international storage facilities (only the Bank of England has about 20% of its total quantity) can last for years as it has already happened to Bundesbank gold kept in the FRS vaults (300 tons for 5 years).
There is an opinion that Switzerland is quite well off for its franc to be the guaranteed reserve currency. The country is the largest external creditor, which puts the national economy into multidimensional dependence on the reliability of such ties. The upcoming "gold" referendum organized in order to increase the quality of currency reserves can have serious consequences for the global economy.

The management of the National Bank is trying to remove the initiative targeted at the undermining for financial stability, but it was not possible so far to avoid the referendum. CHF is extremely popular not only with stock and currency market investors, but also with the central banks of the developed countries; it is well deserved since the last crisis the high demand for assets secured by SNB has led to setting negative rates for such papers. The stable growth of industrial production (1-2% annually), high GDP, low unemployment rate, and practically complete absence of inflation, low level of national debt, and, suddenly, against this promising background, strange doubts regarding the reliability of the country's currency reserves rose. Besides politics and speculations on economic ignorance of the general public, the idea of referendum has common sense - cautious Swiss people want to run a state inspection of domestic storage facilities and return to the motherland (repatriation) its gold reserve kept in the banks of the USA, England, Australia, and Canada. There is a natural desire to check the existence of real physical ingots and not paper, be it even signed on behalf of the state, or bills of debt, or tungsten simulations.

The fact that Switzerland keeps around 30% of its gold and currency assets abroad, facilitates sale on more stable local markets in cases of crisis. At the same time, the demanded return of gold from international storage facilities (only the Bank of England has about 20% of its total quantity) can last for years as it has already happened to Bundesbank gold kept in the FRS vaults (300 tons for 5 years). The comfortable and stable process of Swiss banking will collapse against the background of mutual requests to return physical gold. Populist decisions to ban the sales of gold and currency reserves and increase the permanent share of gold in reserves to 20%, even against the current fall of spot gold due to active sales of ETF-fund assets will lead to the need of additional expenditures for purchase and maintenance of EUR/CHF at 1.200 level for state contracts that are already in operation, as well as will dramatically limit the National Bank's opportunity for monetary regulation. In particular, the reserves sale ban will make SNB activity impossible with regard to performing duty as the participant of the 4th Central Bank Agreement (coordination of transactions with gold for the avoidance of international market disruptions and preservation of the European currency stability). Large investment structures, in particular Société Générale and UBS, are confident that if the gold referendum is approved, then even taking into consideration a many-year delay of turning its results into a law, the influence on the gold market will be rapid and acutely negative for the national currency. The need for additional purchase of more than 1,500 tons of gold (even at the present price - for 65 bln dollars) within three years, according to Bank of America calculations will increase the current price of gold by 15-18% (to 1350-1400 dollars for an ounce).

Even now, any information regarding the referendum causes speculative sell-offs (net long positions fell to monthly minimum). In general, the market believes that the referendum positive decision is quite unlikely; however, if it happens then the devaluation of euro, franc, and Canadian dollar by 1.5-2 figures will look almost normal, the fall of cross rates may go lower. As early as on Monday, euro fell against Swiss franc to the critical level of 1.2009, but the Swiss national Bank is ready to protect this level as much as it will require; however, the process will be complex and lengthy (stabilization took 4 months in 2009). Nevertheless, the decreasing pressure of the Swiss factor on euro and the cross rate EUR/CHF will only grow until November 30. The referendum initiators too much overestimate the role of gold in the system of financial stability, and the example of Canada's normal operation without any own gold and currency reserves is a good proof of that. Gold quotes fell by almost 30% in 2013 only, and the increase of this continuously cheapening asset volume will only complicate franc rate growth stability and Swiss exports competitive ability. Even if the metal itself is not becoming cheaper, it is continuously growing cheaper with regard to stock exchange and commodity indexes, prices for real estate and energy resources. We are only to hope that logic and caution that are characteristic of the citizens of the country of banks and financial stability will prevail, and we hope that the market will respond correctly and will not allow to represent the "gold rush" as the volition of the nation.

作者: Alexander Ward,
ForexChief Currency strategist