Swiss gold referendum a ‘forever’ decision

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If Swiss voters vote in favour of the initiative on 30 November 2014, the Swiss National Bank (SNB) will be forced to hold a minimum of 20% of its assets in gold. It will also be prohibited from selling any gold in the future. In other words, every additional kilo of gold that SNB buys will remain in its ownership forever.

The organisers of the initiative are convinced that the requirements will lead to improved stability and independence for the country. The idea certainly has its merits – particularly given the background of an uncertain economic future for both developed and emerging markets, but the consequences must be considered.

Holding a proportion of the assets in gold makes sense. Gold has the attraction of being a debt-free currency and cannot be inflated by a government. The SNB, according to its own statements, has the highest gold reserves per capita in the world. However, if forced to reach and maintain a level of 20% within a period of five years, then – regardless of the economic circumstances – it will be at the mercy of the gold market. Professional market players will be able to position themselves against the SNB and make speculative gains at its expense, and at the expense of Switzerland’s welfare.

Limiting the SNB’s room for manoeuvre in this way may have negative consequences on other monetary policy strategies such as defending the floor of 1.20 Swiss francs against the euro. In our view, the SNB must be able to buy and, more crucially, sell or hedge gold at what it believes is the right time, so that ultimately it can fulfil its mandate to protect price stability and the economy in Switzerland.

An alternative solution would be a target allocation that the SNB would have to aim for as a long-term average. This target allocation should be set in relation to the SNB’s actual currency risk and hedged to make it market-neutral. Through this approach, gold reserves could be used as a flexible instrument against the inflation policy of other central banks, if required.


Stephan Muller is a gold expert at Swiss & Global Asset Management

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