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Swiss May not be Able to "Save Our Gold"
The euro has slipped to its lowest level against the Swiss franc since late 2012. It has come within about 20 pips of the floor that the SNB has imposed at CHF1.20. The referendum at the end of the month is capturing the attention of market participants.
The referendum, dubbed "save our gold initiative" will be held on November 30. If it is ultimately approved by the voters and the cantons, the Swiss National Bank would be required to 1) keep 20% of its reserves in gold, 2) no longer be able to sell gold, and 3) retain possession of its gold holdings in Switzerland.
After having sold an estimated 1500 tonnes of gold between 2000 and 2008, and rapidly increasing its hard currency reserves during the financial crisis; first by buying foreign bonds in its version of QE, and second by imposing and defending the euro floor/franc cap in 2011. This has left SNB's gold holdings at about 8% of their reserves.
In order to bring the gold holdings to 20% of reserves (~CHF544 bln), it would need to buy about 1500-1800 tonnes of gold, depending on the price and the value of its reserves It would have five years to implement the measure. Most observers conclude it would have to sell some of its currency holdings (primarily euros, but also perhaps some dollars as well). Some observers suspect the SNB's demand for gold would lift the price of the precious metal as much as 18%.
However, we are less sanguine. First, we do not expect the referendum to be approved. The latest polls suggest support is waning for the referendum, which was forced upon the electorate by the Swiss People's Party securing 100k signatures, after the parliament refused to take it up (Swiss population ~8.1 mln). All major Swiss parties and the Swiss National Bank are opposed. The SNB has gone further argue that if the referendum does become law, it will interfere with its ability to achieve its mandate.
Second, the referendum is just the first step in the process. The next step is to get the cantons to approve. A majority of cantons are also reportedly opposed. The cantons typically receive dividend payments from the SNB's reserves. The SNB warns that the profit distribution to the cantons would be in jeopardy if it held so much of the non-interest bearing gold. The cantons use the funds from the SNB to pay for social services. Last year, drop in gold prices (-28%) forced the SNB to cancel the dividend.
However, even if it the proposal passes these first two steps, the SNB still has other options. In principle, the SNB does not have to sell euros or dollars to buy gold, it can create new reserves (print money) to buy gold. In addition, the SNB could form a sovereign wealth fund as many other central banks have done. In this new sovereign wealth fund, the SNB can allocate the bulk of its currency reserves, outside of a modest amount needed for liquidity purposes.
The gold holding requirement is the most controversial of the referendum's measures. The inability to sell the gold has received somewhat less attention, but also would seem to hamper the conduct of monetary policy. It means that the amount of gold it holds is permanent, becoming a fixed part of its reserves, denying officials of the divestment option unilaterally. The referendum also would require the repatriation of the gold back to Switzerland. A little less than a third of the SNB's gold holdings are held abroad (primarily in the UK and Canada). Other countries, including Germany, have brought official gold holdings back to their territory. The liquidity and safety arguments for having kept some of the gold holdings offshore seem somewhat less compelling now.
If our analysis proves wide of the mark, and the SNB is forced to buy 1500-1800 tonnes of gold over the next five years, it would be buying around 7%-10% of the annual gold production. Many observers think that this would be sufficient to put a floor under the prices of the yellow metal. This seems to assume that all other conditions remain constant, which is rarely the case. The prospects of a stronger US dollar and higher US short-term rates are often associated with weaker gold prices. The euro accounts for about 45% of the SNB's currency reserves. Should the referendum be implemented, and the SNB reduces its currency holdings it will be yet another source of pressure on the single currency.
Meanwhile, the SNB should be expected to defend its euro floor/franc cap. It can do so through intervention if needed. The SNB meets again on December 11. With the ECB expanding its balance sheet and looking at additional assets it can purchases, within its mandate, the downward pressure on the euro can be expected to increase. The SNB can adopt a negative target rate for LIBOR. Already, interbank rates are negative out six months, and government bond yields are negative out four years.
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when i asked a member of the SP political party why his party was against the gold intiative, he told me 'gold is a myth'. when i asked him what he meant, he just repeated 'gold is a myth'. gives you an idea about the mentality of many swiss. they have zero concept regarding money. it's more interesting to play with an iphone. lol
Will of the people -- nah, can't have that!
The author seems to 'assume' that the Swiss Gold held abroad actually exists....
I have started a petition on 'Care2 petitions' to RESTORE CANADAS GOLD RESERVE. i UNDERSTAND THAT MOST ZH'ERS COULDN'T GIVE A RAT'S REAR WHETHER CANADA HAS A PROPER GOLD RESERVE.....BUT IT STRIKES ME THAT WE MIGHT BE ABLE TO SHOW SOLIDARITY WITH THE SWISS AND ALL OTHER PEOPLE WHO WANT TO SEE THE WORLD BACK IN BETTER SHAPE. THE LINK IS http://www.thepetitionsite.com/405/184/709/restore-canadian-gold-reserve...
iF YOU HAVE A SECOND....CONSIDER SIGNING THE PETITION.
TNX
Taking a page out of the Scotland playbook?
PTB will never play fair on a level playing field when it comes to protecting the power of fiat.
Michael Noonan's piece yesterday on goldseek is fairly on the mark - not that anyone with a firing synapse or three wasn't able to identify at least 2 years ago. In essense, you can forget about any move towards honest money - or the governance that it brings, until the house of cards collapses. And it is becoming more evident by the month that certain foreign nations - primarily fed up with our foreign policy, will be the ones who precipitate the undoing.
Much bigger changes regarding gold as money are on offer.
Http://www.twitter.com/KarenHudes
the suisse are failing.
http://www.covert.co.nr
Did Armstrong write this one ?
the US will never allow this to happen -
""" Other countries, including Germany, have brought official gold holdings back to their territory. The liquidity and safety arguments for having kept some of the gold holdings offshore seem somewhat less compelling now. """
HaHa, what about 5 tons from the fed.
none of what i just read suprises me in the least. listen up bitchez, we are controlled by this fiat thing with no escape til unravel of the scam-ask ponzi...
Gold is so evil they should just ban it. All it does is interfere with the management of economies and the honest printing of money.
I'll be glad to take all that evil gold off their hands and I'll even do it for free just cause I'm a caring kind of person....
Central banks were net selling into the peak of 2013. They obviously don't think gold is underpriced and wanted to cash in at high prices. I thought it peculiar that they all became so insistent that they needed to sell some of their vast holdings. Notice that NET sales never moved much - a hundred tons a quarter or so. Between all the central banks, someone was vacuuming up 500 or 1000 tons a quarter for YEARS. We don't know any of that detail.
Russia and China are obvious candidates for the huge buyers. Other central banks were happy to sell at the increasing prices. They do want to eventually buy it back - but at the lowest possible price. I don't think they 'created' the last decade of demand, they just wanted to profit from it. Without further Russian and Chinese purchases, the Western central banks can just refrain from purchasing any significant amounts back right now and let the price drop naturally. Look at the relation of demand to prices for the last couple of years.
That's why the central banks are so insistent about the 'freedom' to buy and sell as they please. It's manipulation on a grand scale over many years with the excuse of exchange rate stabilization. That's utter BS. They've unloaded much of their gold (at least on paper) and need the price to continue to drop a lot further before they can slowly rebuild their reserves.
It's not that the Swiss Central Bank doesn't want to eventually beef up their reserves, they just don't want to be told to do it NOW when gold is still relatively high. If they wait with all the other central banks let it drop another $500/oz in the next couple of years, then they can shake out tons of gold held for investment and buy it back over a matter of years on the cheap.
Right now my problem is actually buying physical PM's. My dealer called and told me my order of a week ago will ship in a month and after that he said something about hell freezing over but I can buy all the paper gold I want...joy.