Tuesday, October 21, 2014

Swiss Gold Referendum: If This Passes It Could Change the Gold Price Overnight

By Louis Cammarosano

On Novemeber 30, 2014, the Swiss will go to the polls to vote on a referundum “Save Our Swiss Gold” that, if approved, would require the Swiss National Bank (SNB) to hold 20% of its reserves in gold, repatriate any gold it holds outside its borders and cease selling any of its gold.

Will the Swiss gold initiative pass?

What are the implications for the price of gold if Save Our Swiss Gold passes?

Switzerland is a country that is almost synonymous with gold. The idea of
Switzerland conjures visions of vaults stuffed with gold buried deep in the Alps. Lately, however, Switzerland has been divesting a good portion of its gold. Gold as a percentage of Switzerland’s foreign reserves is just under 8%.

The “Save Our Swiss Gold” referendum is a ballot initiative spearheaded by Luzi Stamm, Vice President of the Swiss People’s Party, (Schweizerische Volkspartei or SVP) that would require the Bank of Switzerland to:

– hold at least 20% of its reserves in gold;

– repatriate of all of its gold currently held outside its borders; and

– ban selling any of its gold.

Many Swiss view gold as important to their nation. Indeed, 100,000 Swiss signed the petition to get the “Save our Swiss Gold” initiative on the ballot.

The Swiss Parliament has rejected the measure by a large majority stating “gold no longer has any meaning for monetary policy.”

The fate of the initiative now lies with the Swiss voters who go to the polls on November 30, 2014.

Up until 1996, the Swiss Constitution contained a provision requiring that the Swiss Franc be 40% backed by gold. In 1992, Switzerland joined the International Monetary Fund. In 1996 the Swiss Franc’s gold backing was severed in an amendment to the Swiss Federal Constitution.

Switzerland started selling their gold in 2000 at the same time that gold began its 12 straight year price surge. Since 2000, the Swiss National Bank has sold about sixty percent of Switzerland’s gold reserves, or nearly 1,500 tons.

The Save Our Swiss Gold referendum would effectively force the SNB to buy it all back.

Swiss Gold Reserves 1990-2013

Against a backdrop of declining Swiss gold reserves and a SNB conducting an extremely loose monetary policy, the battle lines have been drawn – the SNB and the Swiss Parliament vs. the SVP.

For The Save Our Swiss Gold Referendum

The Save Our Swiss Gold is as much about gold as it is about the Swiss regaining stronger national sovereignty.

Impose Fiscal Discipline on the Swiss National Bank

A yes vote on the referendum would restrain the SNB’s monetary policy by forcing the SNB to increase its gold reserves as a percentage of its overall reserves. This would impose fiscal discipline on the SNB and hamper their ability to continue its loose Franc printing monetary policy and make Switzerland less beholden to the IMF and European Union’s policies.

Repatriaion of Switzerland’s Gold

Requiring the repatriation of Swiss gold to Switzerland would also ensure a proper accounting of their gold to ensure its safekeeping and to prevent it from being leased or otherwise hypothecated with out Swiss consent. Twenty percent of Switzerland’s gold is with the Bank of England and 10 percent at the Bank of Canada.

Against The Save Our Swiss Gold Referendum

Restricts the SNB’s Ability to Act Unilaterally

The number one argument of the SNB against the Save Our Swiss Gold initiative is that it would hamper its ability to conduct monetary policy as it sees fit (i.e. print as many Francs as it wishes).

The Swiss Parliament also opposes the initiative on similar grounds that it would put a limit on their spending.

SNB President Thomas Jordan said in an Oct. 1 interview with Frankfurter Allgemeine Zeitung “The initiative has the potential to limit the central bank’s ability to act.”

Jean-Pierre Danthine, the vice-chairman of the SNB’s governing board, said that holding 20 per cent of the SNB assets in gold, “would severely restrict the conduct of monetary policy” and would require the SNB to purchase large quantities of gold AND Euros in order to maintain the 1.2 Swiss Franc to Euro peg “which would almost certainly have caused the foreign exchange markets to doubt our resolve to enforce the rate.”

“A rigid and unsaleable minimum gold holding would make it difficult for the SNB to fulfill its mandate to ensure price stability and to contribute to the stable development of the economy.” said Finance Minister Eveline Widmer-Schlumpf.

Repatriation Leads To Lack of Geographic Diversity

A secondary argument againt Save Our Swiss Gold is that the repatriation provision means that the Swiss gold would all end up in one basket in Switzerland, subjecting it to concentration of geographic risk.

Thomas Jordan believes that having some of the Swiss gold held abroad provides “adequate regional diversification and good market access.”

Gold That Can’t Be Sold is No Emergency Supply and Doesn’t Pay Interest

Critics argue that gold held in reserve that can’t be sold can not serve as an emergency supply. In addition, another minor argument is that gold held in reserve does not pay interest or dividends. Given that other reserve assets pay next to nothing in interest, this is not a serious drawback to holding gold in reserve vs other reserve assets like sovereign debt bonds.

Will The Referendum Pass?

Save Our Swiss Gold is being promoted by the Swiss People’s Party which according to Mark O’Byrne of GoldCore: “is the largest party in the Swiss Federal Assembly, with 54 members of the National Council and 5 of the Council of States.”

The SVP introduced the “Stop Mass Immigration” referendum that passed narrowly earlier this year 50.3% to 49.7% with a 56.5% turnout of Swiss voters.

The size of the SVP and track record of getting popular initiatives passed make the Save Our Swiss Gold referendum worthy of serious consideration that it might pass.

The Gold Anti Trust Action Committee noted recently: “Opinion polls will not appear until later this month, and have proved unreliable before previous votes.”

What Would A Yes Vote Mean?

For The Swiss Natonal Bank

Large Gold Purchases

The biggest initial issue for the SNB would be how would they get their gold reserves up to 20%. The SNB would have to buy about 1,500 tons over five years to bring its reserves up to the 20% threshold that the Save Our Swiss Gold initiative would require.

The SNB would have to buy half the annual production of gold for a considerable period of time says Ole Hansen, Head of Commodity Strategy / Saxo Bank

Gold Repatriation

The SNB would have to repatriate 104 tonnes of Swiss gold from the Bank of Canada and 208 tonnes from the Bank of England. This might seem to be a straight forward procedure. The experience of Germany’s unsuccesful gold repatriation request of the U.S. Federal Reserve and the French Central Bank in early 2013 may foretell, however, that repatriating large sums of gold is more complicated (and uncertain) than simply making a request and arranging for delivery.

For the Swiss People

If the Save Our Swiss Gold referendum passes it would reflect a populist victory and result in reigning in the SNB from conducting unhampered reckless monetary policy.

For the Price of Gold

If the initiative passes it would create plenty of interest in gold and also create massive demand from the SNB as they would be required to buy 1,500 tons of gold.

One would think with a limited supply of gold and increased demand that the price would rise.

The above originally appeared at Smaulgld. And is reprinted with permission.


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