On November 30th, Switzerland will ask the voters amongst its roughly 8 million citizens to vote on a gold-related referendum introduced by the Swiss People’s Party. The referendum’s goal is to limit the Swiss National Bank’s (“SNB”) reckless behavior towards the nation’s currency by eliminating future gold sales, repatriating Swiss gold currently held in foreign vaults, and establishing a rule whereby a minimum of 20% of the assets of the SNB is required to be held in the form of physical gold.
If you’re an active follower of precious metals related news, you have probably seen and read dozens of articles about this topic already. Some of the articles are purely fact-based while others attempt to speculate about the immediate effect of a “yes” or “no” vote. In my opinion, any initiative that limits the power of any central bank to print currency and manipulate currency exchange rates and/or interest rates should be seen as a positive. So while I’m not sure if the current proposal is an ideal proposal, I am confident it is better than allowing the SNB to do as it pleases with the nation’s currency. To the extent that the referendum forces some members of the public to become aware of the way the financial system really works, it is a step in the right direction regardless of the vote’s outcome.
According to the Swiss National Bank President, Thomas Jordon, “The SNB does not generally comment on any political initiative,” yet they “consider it (their) duty to point out the serious disadvantages of the initiative.” This quote is dated April 2013 and should be taken as a loud signal that the SNB (and every other central bank for that matter) will go out of their way to defend their currency printing schemes and accompanying balance sheet expansions. In a more recent quote, the SNB suggested “the initiative is dangerous because it would weaken the Swiss National Bank.” What it would actually do is eliminate the SNB’s ability to print currency and peg the value of the Swiss franc to the euro. This should hardly be labeled as a dangerous initiative. A “yes” vote should actually be explained as an initiative to force the SNB to practice honest central banking in an attempt to lead other central banks in the world to do the same. The broad message from the “no” vote camp is the SNB must be allowed to manipulate the Swiss Franc to a level it deems appropriate in order for Swiss exports to compete effectively with the rest of Europe. It is remarkable that the economic absurdities being touted by the “no” vote camp are believed by the majority these days.
It should surprise no one to see the cacophony of no-vote propaganda reach its apex as we get closer to November 30. Despite the Swiss citizen’s reputation for independent thinking, it is reasonable to assume the SNB will be successful in convincing an adequate number of voters to vote “no”, thereby allowing the nation’s central bank to continue to destroy the country’s once formidable reputation as strong currency advocate. But let’s not prejudge the competence of the SNB based on a couple of random thoughts and admittedly subjective opinions. Let’s instead look back at the recent history of the SNB’s actions and make a more objective case for why no one should be listening to anything the SNB has to say on the issue.
In 1999, Switzerland’s Constitution was amended: “As an independent central bank, the Swiss National Bank shall follow a monetary policy which serves the general interest of the country; it shall be administered with the cooperation and under the supervision of the Confederation.” According to data from the SNB’s website, they held 83,277 ounces of gold as of March 2000. By March 2003, they had reduced their gold holdings to 59,356 ounces. The selling continued and by March 2006, the SNB held 41,479 ounces of gold. In only 6 years, the Swiss National Bank sold roughly 50% of its gold holdings, presumably at market prices which ranged from US$280 to US$580 per ounce at the time.
Today, gold is priced at about US$1200 per ounce at what many consider to be close to the marginal cost of producing the harmless yellow metal. It is a fact that the SNB sold 41,798 ounces of gold at prices ranging from 25%-50% of what they could fetch today. How’s that for serving the general interest of the country? The evidence here suggests the real danger was in giving the SNB the authority to liquidate gold from the asset side of its balance sheet in the first place. Having gutted their gold reserves down to 33,439 by August 2011 and during the height of the euro crisis, the SNB came out with a doozy of an announcement on September 6th, 2011: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
Forget about the fact that for many decades, Switzerland pursued a strong currency policy which aided the tiny nation in consistently strong economic growth. All of a sudden none of that history mattered, and the public was being asked to believe in a monetary policy that promised to do the exact opposite of the one that had made the country one of the economic envies of the world. Of course, it didn’t matter much what the public thought since the SNB already had the power to pursue whatever monetary policy it felt like pursuing. And with that, the SNB printed massive quantities of Swiss francs and more than doubled the size of its balance sheet to maintain the 1.20 euro currency peg.
As of September 2014, the SNB held 33,437 ounces of gold and, despite a near five-fold increase in the price of gold, had “successfully” reduced its gold holdings from 43% of reserves in 1999 to about 8% in 2014. This has left its balance sheet with about as many holes in it as a piece of Swiss cheese and has completely destroyed the nation’s global reputation for having a sound currency. Why should anyone listen to anything the SNB has to say now? They seem to be just as disingenuous and incompetent as every other central bank in the world.
Recently, the finance minister of Switzerland was asked in parliament where Switzerland’s foreign held gold was stored. Her reply: “Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know, and because I do not want to know.” Sounds like something Dr. Seuss might say. That just about sums it up doesn’t it?
Coming back full circle to discuss the purpose of the three constraints that a “yes” vote would place on the SNB, I must say I doubt that a thoughtful and balanced implementation of these constraints will pose any sort of danger to Switzerland’s economy over the long-term. I do agree with the SNB remark that a “yes” vote would weaken the Swiss National Bank, and I would suggest this is a very good thing because the SNB has proven their incompetence over time. The really sad part is they are probably one of the better run central banks in the world.
Disclaimer: The views expressed in this article are those of Antworthy Investment Management Ltd. (“we”) and are for general information purposes only. The contents of this article should not be taken as being investment advice or a recommendation to trade in any securities. All statements of fact provided in this article are obtained from sources we consider reliable, but we do not guarantee their accuracy and any such information may be incomplete or condensed. Views are subject to change on the basis of additional research and facts. Any individual considering making an investment should seek independent advice. Past performance is not indicative of future results.