“Money is sound when it fulfils its functions as a means of payment
and store of value as smoothly and reliably as possible in people's everyday
lives. Sound money retains its value and is generally accepted. It also makes
an important contribution to social harmony and material prosperity. Sound
money is therefore a central pillar of our [Swiss] society. The mandate of
monetary policy is to ensure that money remains sound. Consequently, the
Swiss National Bank (SNB) bases all of its activities on this mandate.” Thomas
Jordan, Chairman of the Governing Board of the Swiss National Bank, Nov.
23, 2014 just before the Gold Referendum on Nov. 30, 2014
I expected a positive outcome in the Swiss Gold Referendum (Nov. 2014) to
create a tsunami in the gold and foreign exchange markets but didn’t expect
the tsunami created by the unpegging of the Swiss franc (Jan. 2015);
especially after the absolute assurances given by the Swiss National Bank
(SNB) during the referendum campaign. If the negative vote in the Swiss gold
initiative was not a surprise, the de-pegging of the Swiss franc only a month
and a half later was. How can we explain such a reversal so short after a
campaign by the SNB against gold? We must remember that during the referendum
campaign the SNB and its president strongly defended the peg and promised it
will continue. I expected the Swiss Gold Referendum to be the big shock in
the central bank sector and the gold market, but only if passed and it
didn’t. However, the consequences of the initiative, I am sure, helped
prepare the “big surprise” event that was the lifting of the cap by the SNB
just a month and a half later. The strong support for the initiative scared
the banking industry and the SNB and, even though defeated, I think it
affected in some way the central bank. It was a message from the people.
Was the de-pegging really so unexpected? Or was the timing of the
de-pegging the only surprise? Several analyst were saying repeatedly that the
peg was unsustainable and that its end was just a matter of time. Still
according to Minyanville
“The EURCHF fell about 16% in today's trading [Jan. 15, 2015]. To put
things into perspective, depending upon the historical range, that is at
least a 35 standard deviation event. In terms of the probability of seeing
such an event, a 25 standard deviation event is likely about once every
100,000 years”. What did change in such a short time to make the SNB
change its mind and surprise in such a way the foreign exchange markets? I
personally don’t see any valid argument just excuses. In my opinion, it just
proves that those in charge of the central banks have no idea of what they
are doing. Some even admit it in private conversations and others even hint
it publicly with words like “we are in unchartered territory” and “we
learn by doing”. Remember that before becoming president of the SNB,
Thomas Jordan wrote a paper in 1999 on “Why Switzerland should never peg to
the Euro” then doing the opposite once president of the SNB, and reversing
again in a surprise move that shocked the global foreign exchange markets.
Not only that but it also started a chain reaction of devaluations and
interest rate drops by central banks worldwide. Currency wars at its best? I
certainly think so. If the Swiss did not shock the global central bankers
with the gold initiative, the de-pegging of the franc certainly did.
Can we expect another surprise from the Swiss? I think we can. We already
see a dissatisfaction of the Swiss government with the Swiss central bank and
a demand for more consultation between the government and the SNB’s
executive. If Mr. Jordan was capable to do a 180° turn on the euro peg, he
can definitely do it also on the issue of gold. That is, if he doesn’t retire
first (pushed out or voluntarily).
I wrote long before the referendum in April 2014 in an article “Switzerland’s Role in the Gold Market” how important gold
is in the Swiss economy and therefore how knowledgeable the Swiss are about
gold. From the refining process in the canton of Ticino, world central
banking gold trading at BIS in Basel, international transportation of gold,
safekeeping vaults in Zurich and Geneva, and the jewelry fabrication in
Geneva, the Swiss still dominate the gold market worldwide. It remains that
the Swiss banking industry and the SNB both became in the recent years
excessively Americanized and therefore excessively anti gold. It was evident
recently in the television debates during the referendum campaign. In the 60s
Swiss banker advocated a 10% gold allocation in a portfolio.
In a more recent article and a review of the Swiss gold referendum “Gold and Switzerland After the Referendum” I mentioned
that I did not think this is the end. Other popular initiatives will come up
in favor of gold. What makes the Swiss so attracted to gold? The Swiss have
always had a preference of lean, stable and good government and stable
currency and often turn down through referendums expensive government
initiatives and wasteful expenses. Sound money is a central pillar of Swiss
society. That’s why people and foreign governments are eager to store their
wealth in Switzerland pushing up the Swiss franc. Already in the 1970s,
during the dollar crisis that forced President Nixon to end convertibility of
the dollar in gold, a run into the Swiss franc forced the government to
introduce a tax on bank deposits in Swiss francs by foreigners. At that time,
the Swiss franc was backed by gold through a 40% gold reserve requirement
that was anchored into the constitution. Switzerland still is 5th out of the
20th largest official holders (excluding the IMF) of gold reserves with 1,040
tonnes. However, in order to maintain the euro peg the SNB has bought very
large amounts of foreign currencies (mostly euro) decreasing on a percentage
bases the gold portion of foreign exchange reserves to just 7.7%.
Switzerland Gold Reserves
According to Ferdinand Lips in his famous book Gold Wars: “By 1968 the Swiss had captured
an estimated 80% of the world’s physical market”. Since the end of the
1990s under US and IMF pressure, the trend reversed.
World Gold Reserves – Top 20 Holders (Tonnes)
World Gold Reserves – Top 20 Holders (Percentage of Reserves)
SNB lied to the Swiss people about the franc peg during the gold
referendum the same way US president Franklin D. Roosevelt lied about the $20
dollar peg when he seized gold in 1933 in the US. Since they did a surprise
shift that shocked the financial world once, they can do it again. However,
this time I think it would be in favor of gold. The massive printing of fiat
worldwide shows already that it didn’t help the global economy; it just
barely kept it alive and postponed the inevitable. Because of the
conservative approach to money by the Swiss, I will not be surprise of a
sudden change in attitude towards gold by the Swiss people, government and
the central bank. The affinity with the gold market is there deeply anchored
into the Swiss tradition. It wouldn’t even require a referendum if there is a
shift in attitude in the Swiss National Bank; certainly under public opinion
and political pressure.
In its most recent CPM Gold Yearbook 2015, CPM Group remarks that more
gold enters Switzerland than leaves. They correctly point out that most
commentators focus on the flow of gold into China and India ignoring the
astounding increase in gold holdings in Switzerland. Switzerland, they say
has been a major trading and storage site for gold for centuries and it
continues to be. This week Thomson Reuters’ Gold Survey 2015 also allocates a
paragraph to Swiss gold imports/exports. Periods of large increases of gold
imports into Switzerland (see chart below) correspond with periods of
monetary crisis like 1973 (collapse of Bretton Woods) and 2008 (global
financial crisis). As the gold market is very opaque it is very hard to know
or estimate the amount of gold flowing into Switzerland, especially in
physical form and going into vault companies or private safe deposit boxes.
More and more people also avoid gold deposits into the banking system.
Swiss Gold Imports/Exports
In conclusion, it is my view that you shouldn’t ignore Switzerland in
analyzing the gold market. As we have seen, even though Switzerland is a very
small country it plays a major role in the gold and foreign exchange markets
and can create a shock with a very large impact that some call loosely a
“black swan” event. Since interest rates have gone negative also in
Switzerland, more and more individuals but also pension funds are looking
(for now very discretely) into depositing cash and gold in vaults outside the
banking system in order to save fees. One pension fund manager estimated recently saving 25,000
francs on a 10,000,000 francs deposit.
I do expect some kind of a surprise event coming again this year either/or
both from Switzerland and China that will shock and affect the gold market.
Price of Gold in Swiss Francs per Once
Price of Gold in Swiss Francs since Introduction of the Euro Peg until the
End of the Peg
Price of Gold in Swiss Francs at the End of the Peg
