A Mad Referendum In Switzerland Could Permanently Warp The World's Gold Market
A bizarre proposal from a Swiss political party would have
the country's central bank holding one fifth of its $547
billion of assets in gold, a move that could vastly increase
risk during a financial crisis as gold prices are extremely
volatile.
Case in point: Gold is currently tumbling. It just broke below $1,200 for only the second time this year.
But the Swiss Peoples' Party, whom you may remember from their previous — and successful — referendum proposals for a stricter immigration policy and the banning of new minarets thinks this a good idea anyway.
The party has organized a referendum that would force the country's central bank to buy thousands of tons of gold. A Swiss-wide vote is set to take place in exactly a month's time.
The Wall Street Journal lays out the details of the proposal:
It's a popular trope that gold investors (sometimes known as "goldbugs") retreat to the precious metal out of fear of coming inflation, often an instinct brought on by interest rate cuts and quantitative easing.
So it's pretty funny that the new referendum would bring in a sort of QE for gold: As the asset (gold) price falls, the central bank would be forced to intervene again and again to buy more and more.
Sebastien Galy at Societe General explains that having its hands tied would not be good for the bank in the case of a crisis:
Galy goes on to show the policy would work in the favour of
existing gold owners:
Case in point: Gold is currently tumbling. It just broke below $1,200 for only the second time this year.
But the Swiss Peoples' Party, whom you may remember from their previous — and successful — referendum proposals for a stricter immigration policy and the banning of new minarets thinks this a good idea anyway.
The party has organized a referendum that would force the country's central bank to buy thousands of tons of gold. A Swiss-wide vote is set to take place in exactly a month's time.
The Wall Street Journal lays out the details of the proposal:
- The Swiss National Bank would have to hold a fifth of its $547 billion of assets in gold
- The proportion it currently holds is less than 8%
- The Swiss National Bank wouldn't be able to sell gold
- All of the SNB's gold would have to stay in Switzerland
It's a popular trope that gold investors (sometimes known as "goldbugs") retreat to the precious metal out of fear of coming inflation, often an instinct brought on by interest rate cuts and quantitative easing.
So it's pretty funny that the new referendum would bring in a sort of QE for gold: As the asset (gold) price falls, the central bank would be forced to intervene again and again to buy more and more.
Sebastien Galy at Societe General explains that having its hands tied would not be good for the bank in the case of a crisis:
From a risk management
perspective, a rule to maintain a 20% ratio of the Swiss
foreign reserves in Gold is quite atypically Swiss. In times
of crisis, it would vastly increase the portfolio’s risk
while vastly reducing its liquidity. This may not be seen as
an issue as the Swiss franc has proven to be a safe haven
historically. However, the case for a safe haven may be less
clear 10 or 20 years down the road.
The new gold rule would be the
equivalent of giving a large put to the market. Each time
Gold collapses, the SNB would automatically buy gold so that
the 20% reserves ratio is maintained, and this would
presumably be achieved by mostly selling euros and dollars.
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