End of November could be a game-changer for the precious metals market – Gold in particular. Whilst financial markets are pre-occupied with today’s vote in Scotland on whether to become an independent county, November seems a long way off but successful trading in volatile times is about not just about catalysts in the here and now, but proactive about future catalysts as well.
On November 30th voters in Switzerland will vote in a referendum. On the ballot is a measure on 3 key decisions:
- Prohibit the Swiss National Bank (SNB) from selling any more gold.
- Repatriate all Swiss-owned Gold back to Switzerland [particularly from the US, UK and Canada]
- To mandate that physical gold bullion make up at least 20% of all SNB assets.
The Swiss referendum is driven by strong dissatisfaction with the conduct not only Swiss monetary policy, but also of Swiss banking policy. Switzerland may be a small nation, but it is a nation with a proud financial history and reputation. But in recent years, that financial independence and reputation has been degraded by foreign countries forcing it to disclose financial details as well as the policies of the SNB itself. On the monetary policy front, the SNB sold about 60 % of Switzerland’s gold reserves during the 2000s. Many central banks, like the Bank of England and SNB, sold masses of gold. Only a few, like Germany decided to retain their reserves , though they are yet to repatriate most of it from the US after years of demanding its return.
Previously the franc was correlated to gold mostly thanks to low Swiss inflation and strong monetarist ideas in the SNB. In recent years, the SNB established a currency peg, with 1.2 Swiss francs equal to one euro. The peg’s effects have already manifested in the form of a growing real estate bubble, as housing prices have risen sharply. Given the action by the European Central Bank (ECB) to engage in further quantitative easing, the SNB’s continuance of this dangerous and risky policy means that it will continue tying its monetary policy to that of the EU and will likely be forced to import more inflation into Switzerland. The percentage of SNB gold holdings has fallen from 30% to 10% over the last 14 years. If successful, the referendum proponents would get their wish to see it raise to 20%.
What if Switzerland Votes “Yes”?
The gold referendum, if it is successful, would be a very forceful rejection to the current monetary and banking policies in Switzerland, and those responsible for them. In a broader extent, the policies of other central banks worldwide would have to take heed. The results of the November referendum may be a bellwether, indicating just how strong popular movements can be in establishing central bank accountability and returning gold to a monetary role. The SNB would be forced to:
1.) Either double the quantity of gold holdings [i.e. buy it expensive after selling it cheap years before]
2.) Sell a significant amount of its fiat money reserves to rebalance its assets.
In the first option the Gold price would rise significantly. In the second option, the Swiss franc would rise dramatically against a basket of currencies, including the Euro and US Dollar, which indirectly should see a rise in the Gold price.
I’ll be watching closely to see what transpires. What happens could tell us much about where we place our trades in the months to come.