- This weekend the Swiss public will probably reject a proposal to force the Swiss National Bank (SNB) to increase its gold holdings. Nonetheless, a surprise “yes” would provide a significant boost to the gold price and might also undermine the SNB’s efforts to limit the strength of the franc against the euro.
To recap, the Swiss vote on Sunday on a “Save our Swiss Gold” referendum organised by the populist Swiss People’s Party. If passed, this would oblige the central bank to hold at least 20% of its assets in gold and prohibit the central bank from selling any of its gold holdings in perpetuity.
- The proposal seems likely to fail. For a start, the latest polls show a large majority against, with 47% opposed, only 38% in favour and 15% undecided. What’s more, the proposal has to be passed both by a majority of those voting and by a majority of the cantons individually. We suspect that, just as in the vote on Scottish independence, the “don’t knows” will lean towards the status quo. Indeed, there are some compelling arguments against the proposal. In particular, a permanent ban on selling gold would effectively render it useless as a reserve asset, since nothing could be done with it in an emergency.
- Nonetheless, it is worth considering the implications of a surprise “yes”. The SNB currently owns around 1,040 tonnes of gold, equivalent to 7.5% of its total reserves. (See Chart 1.) Achieving the 20% target would therefore – other things being equal – require additional purchases of around 1,730 tonnes. The SNB would have up to five years to rebalance its portfolio, but the sums would still be significant. Net investment demand for gold globally is currently running at around 200 tonnes per quarter. Even if spread over the full five years, the SNB would have to buy an additional 87 tonnes per quarter.
- What’s more, the SNB’s balance sheet has already increased significantly to finance intervention to limit the strength of the franc against the euro. (See Chart 2.) The SNB may be able to unwind its intervention and trim its holdings of non-gold assets in the coming years, thus reducing the amount of gold that has to be bought. But in the near term at least, it seems more likely that further monetary expansion and hence additional gold purchases will be needed, especially if the ECB adopts full-blown QE.
In the event of a “yes” vote (or even a narrow rejection), the price of gold may also benefit from expectations that other central banks would be under more pressure to add to their holdings too. Most in the developed world already have more gold than the SNB, but the appetite in emerging economies is only likely to strengthen further. Overall, our end-2016 forecast for the gold price is $1,400 per ounce, compared to today’s $1,190, but a Swiss “yes” could see that target hit much sooner.
- Turning to the FX implications, a “yes” vote would not prevent the SNB from intervening to cap the franc. In principle, buying gold with newly-created francs could be just as effective in undermining the Swiss currency as buying German (or US) government debt. But monetary expansion of any kind would require the SNB to accumulate gold that it could never sell again. This might soon lead the Bank to try alternative policies – such as negative interest rates – to keep the currency down. At the very least, the FX markets would surely test the SNB’s resolve in the wake of a “yes” vote, especially as the franc is already only a whisker away from its minimum of 1.20 to the euro.
- This Economic Briefing is courtesy of the team at Capital Economics, please feel free to contact them for further information and to get access to their outstanding research
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