World Economy

Switzerland Set to Grab Gold

Switzerland Set to Grab GoldSwitzerland Set to Grab Gold

The Swiss National Bank (SNB) could soon be obliged to begin acquiring gold because of a very specific question posed by a referendum.

On Sunday, November 30th, 2014, the Swiss will go to the polls to vote their response to a question titled “Save Our Swiss Gold”. If this were approved it would require the SNB to:

1. Hold 20% of its reserves in gold.

2. Repatriate any gold it holds outside its borders.

3. Cease selling any gold.

Over the past few years the SNB has been an active seller of the precious metal to the extent that gold as a percentage of Switzerland’s foreign reserves has fallen from 29.0 percent in 2006 to 1,040 tons or 7.8 percent in September 2014, Forbes reported.

The referendum is the initiative of Luzi Stamm, vice president of the Swiss People’s Party, (SVP). The view is that the world may be destined to live in an environment of zero-bound interest rates for considerably longer than has previously been envisaged and that gold should become a core holding of the nation once again. Unlike currencies such as the dollar, euro, sterling or Yen it cannot be manipulated by asset purchases that inflate central bank balance sheets.

  Forced Selling?

The Swiss are well known for their independent attitude to life. After all Switzerland is the 19th largest economy and yet is not a member of the G20. It prefers to chart its own course, choosing to follow whatever G20 rulings suit it. Of course that attitude has led it into conflict with several other nations over non-resident bank accounts that hoard hidden fortunes.

If we delve into the economic history books one will find that up until the end of the Bretton Woods Agreement, the Swiss accumulated large gold reserves given that they were running a steady current account surplus.

This placed the SNB at odds with the International Monetary Fund (IMF) and it is not surprising to note that this difference of opinion prevented Switzerland from joining the IMF until 1992. By so doing the Swiss had to adhere to the rules of membership and that meant slowly weaning the Swiss Franc (CHF) off the link to gold.

The introduction of floating exchange rates and the floating of the gold price reduced the importance of the fixing of the gold price in the SNB balance sheet. As the new millennium began so the IMF intensified the process to demonetize gold as the new mantra was that within a globalized economic and financial system the US dollar as the global reserve currency would counter any future supply-side and inflation issues.