Swiss Gold: SNB independence under threat

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Alix Bhend-Lambin, strategist at Lombard Odier comments on the implications of the Swiss gold referendum.

The Swiss referendum on November 30th to “save Switzerland’s gold” has caught the attention of many economists. The initiative would require the Swiss national Bank (SNB) to hold at least 20 per cent of its assets in gold, up from 8 per cent currently. In practice, this would limit the SNB’s capacity to operate and fulfil its legal mandate as a central bank, as well as jeopardise its independence. In addition, its implementation would be counterproductive both from an economic and financial standpoint.

A “yes” vote would compel the SNB to sell part of its foreign exchange reserves to buy half of the world’s annual gold production. Such an intervention, even spread over five years, would drive the Swiss franc upwards and threaten the floor of 1,20 francs per euro, given the SNB’s limited capacity to defend such a rate. A premature drop of the floor rate would then expose the Swiss economy to a brutal appreciation in its currency, bound as it is to safe-haven flows in a still-fragile economic environment.

Furthermore, the proposal would make the SNB’s gold reserves non-transferable. Such an absolute ban on reselling recently-bought gold would mean that the precious metal would account for a disproportionate share of the SNB’s assets, once the crisis is mitigated. The SNB would be left with a concentrated risk in a volatile asset, deprived of yield.

The SNB, just like other central banks, must be able to maintain flexibility in order to successfully conduct its monetary policy and fulfil its mandate as price stabilizer. It is a precarious exercise in the current context of the crisis, which the central bank has studiously fulfilled until now. To pursue this goal, the SNB’s balance sheet must be as liquid as possible. Putting in place a minimum level of gold assets would be a major obstacle to the mandate.”

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