Swiss poll distracts gold market, but not for long

Singapore

EVEN as five million Swiss nationals head to the polls on Nov 30 to vote on a proposal that would force the central bank to increase its gold reserves, an economist has likened gold to "shiny Bitcoin", saying that the initiative makes no sense.

If passed, the proposal - closely watched in the gold and foreign currency markets - could provide a short-term fillip to the gold price that has been on a downward trend this year. Many, however, are expecting a "no" vote, as support for the proposal falls in opinion polls, and the central bank chairman calls it a "dangerous" initiative.

The "Save our Swiss Gold" initiative by the right-wing Swiss People's Party is aimed at banning the central bank from offloading its gold holdings. The Swiss National Bank (SNB) has sold nearly 1,500 tonnes since 2000, when the bull market for gold started.

Under this initiative, the SNB would have to hold at least a fifth of its assets in gold within five years, up from the current 7.8 per cent level, or 1,040 tonnes of gold.

It would also be required to repatriate all Swiss gold stored overseas - a third of which is now held by the Bank of England and the Bank of Canada - and would be banned from selling any of its holdings in future.

The proposal makes no sense, said Citigroup chief economist and former Bank of England external policymaker Willem Buiter, who likened gold to virtual currency Bitcoin in that it has no intrinsic value.

Even if it had, to invest a fifth of SNB assets in a single commodity would be unsound.

"If the central bank is to invest in commodities, better to have a balanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity ETFs (exchange-traded funds) or other derivatives," he said in a Nov 26 report.

Furthermore, holding all of its physical assets in one nation ignores the benefits of geographic diversification.

The ban on selling any of the gold holdings would also make them worthless, he added. "The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral," he said. "The gold becomes useless as a store of value of any kind."

SNB chairman Thomas Jordan has repeatedly warned of the consequences of the proposal, saying it would "greatly restrict our monetary policy room for manoeuvre".

The central bank in September 2011 introduced a minimum exchange rate at 1.20 Swiss francs per euro, in order to prevent further appreciation of the franc and keep Swiss exporters competitive. If the gold initiative were adopted, foreign currency purchases would have to be matched by proportional purchases of gold, making such interventions more costly.

"The SNB's flexibility would be reduced, and its credibility would weaken, making the euro-franc peg difficult to defend," said Morgan Stanley in a note. "In this scenario, Switzerland would have to deal with a currency-induced deflationary shock."

Proponents argue that Switzerland would be better protected from the volatility of currency markets with a greater proportion of its reserves in gold. But support among voters has waned - slipping from 45 per cent in a survey conducted in October to 38 per cent in a Nov 23 opinion poll, Reuters reported.

The likelihood of a "yes" vote also seems to have been discounted by the gold market, said HSBC analyst James Steel. "The overall downwards course of the market since April 2013 - when proponents gathered the minimum 100,000 signatures mandatory for voting - makes it difficult to believe that investors are seriously worried the referendum will pass."

If it does come through, however, observers expect it to be positive for gold in at least the short term.

Estimating that purchases of nearly 1,500 tonnes of gold - the amount China consumed last year - would be needed to reach the required 20 per cent holdings, Mr Steel foresees that a "yes" vote could boost gold prices by as much as US$50 an ounce.

The gold spot price, which has fallen for most of this year, has rallied in recent weeks, from a low of US$1,145 an ounce on Nov 7 to US$1,201 an ounce on Nov 25 before falling in the past two days as a result of lower oil prices. Analysts, however, attribute this to increased purchases in emerging markets, rather than positive expectations of the Swiss referendum.

In the mid to long term, the direct impact on the gold market would likely not be significant, as the SNB has up till 2019 to meet the ratio, said Mark Keenan, Societe Generale's head of commodities research in Asia.

Concurring, Stefan Graber, vice-president of commodity strategy at Credit Suisse, said the SNB is likely to postpone any gold purchases in the hope that its balance sheet size would be smaller in a few years, therefore requiring fewer additional gold reserves.

What is clear is that a "no" vote would make for a continued bearish market for gold. "A 'no' vote would shift the focus back to the broader theme of continued US dollar (USD) appreciation, reducing the appeal of USD-dominated gold investments," said Mr Graber.