Gold News

What 'Violet Thursday' Did for Swiss Francs, QE and the Gold Price

The Swiss central bank's Euro peg marked the top in 2011 gold prices. Now it has gone...
 
VIOLENT doesn't say it. Violet might, writes Adrian Ash at BullionVault.
 
That's violet in honor of the largest Swiss banknote, the 1000 Franc note.
 
Because that's what hedge fund types who bet against the Swiss Franc keeping its peg of CHF1.20 per Euro should have used to pay for lunch on Thursday...
 
...while lighting their cigars with the biggest denomination Euro paper, the €500 note.
 
Odd coincidence, but the day the SNB imposed its peg at CHF 1.20 per Euro – back on 6 September 2011 – was the day gold peaked at $1920 per ounce. It's been downhill pretty much since then.
 
How come? Well, like Mario Draghi's "whatever it takes" speeches of 2012 (when the Euro gold-price again hit those highs), the Swiss peg suggested that central bankers were taking charge...and had everything under control.
 
Who needed gold? Who needs it now? Maybe ask this week's new buyers...or simply take a quick look at what the Swiss news did for gold prices in all currencies barring the super-charged Franc.
 
The Swiss blow-out on Thursday saw trading volumes on BullionVault's physical gold and silver exchange jump to the strongest level since June 2013.
 
In cash terms, trading reached well over twice the last 3 years' daily average, and it was the strongest since the Spring 2013 crash finally found its floor.
 
Users were, as then, slight net sellers on the day, with Sterling investors in particular taking profits if not cutting losses from the last 3 years' drop at these 16-month highs. Good buying has since come in, however, notably from Euro clients ahead of what looks certain to be full Quantitative Easing from the European Central Bank next Thursday.
 
If past QE announcements from the Bank of England and US Fed are any guide, traders might expect a quanti-climax in gold prices short term. Buy the rumour, sell the news – it applied every time, no matter the underlying direction in gold.
 
And as for those rumours, this week's SNB announcement was a hammy actor's shouted stage-whisper...winking that they know something big is coming from Draghi and his Eurozone committee next week. 
 
Why didn't you tell us you were about to end the peg? bleats the International Monetary Fund's chief, Christine Lagarde.
 
Because, SNB chairman Thomas Jordan told reporters on Thursday, removing the Franc's low peg...and letting it move higher as market demand wanted... had to be a surprise.
 
And a surprise it was!
 
The Euro lost 25% inside 10 minutes against the Swissie...or maybe 40% depending on whose data you check... 
 
...while the Swiss stock market dropped over 10%...
 
...as Swiss government bond prices jumped so high, the annual yield they offer has gone negative on all debt out to 7-year maturities... 
 
...and the gold price lost 23% for Swiss investors top to bottom before recovering half that plunge and settling Friday at CHF 1,100 per ounce...just above the 10-month low seen in October 2014.
 
Why so crazy? One currency dealer "was lost for words...The thing which could not happen, has occurred – the speculators have won against the National Bank."
 
In truth, most FX speculators...certainly at the 'retail' level...were betting the other way. So they got filled, drilled and killed on Thursday's huge spike, and their losses in turn have  started killing some of the larger FX bookmakers too.
 
But yes, the Swiss National Bank...after printing billions of Francs (electronically) and throwing them at the FX market to try and keep the currency low... gave in to the flood of bank account inflows on Thursday.
 
That means the Euro's false level of CHF 1.20...attacked by hedge funds and other currency traders, and defended with all those billions of Francs from nowhere...has gone.
 
So the "speculators" were right in other words. Their "speculation" that central banks cannot fight the market proved anything but a wild guess...and the Franc has shot higher. 
 
Priced in Francs (currency code CHF), the Dollar sank together with everything else...losing 14% by midday here in London. The Euro meantime touched CHF 0.71 on some screens (we doubt anyone dealt down there)...whipping back to 0.98 by the end of the week.
 
That still marks the single currency's lowest ever valuation against its small, wealthy neighbour's money. 
 
What to make of it all?
 
First, let's call Thursday's SNB shock what it is. A "reverse Soros".
 
Back in 1992, the Hungarian speculator (and wannabee philosopher) George Soros bet £1 billion...some $1.5bn...that the British Pound could not stay inside the pre-Euro system, then called the ERM (exchange rate mechanism). 
 
Soros' huge bet famously "broke the Bank of England"...forcing it to sell huge quantities of foreign currency to buy Pounds in the open market...and forcing the government to hike Sterling interest rates from 10% to 12% and then 16%...in the hope of driving its value higher and maintaining the peg against Britain's partner currencies in the European Union. 
 
Alas, the Pound was weak for good reasons, and the market won. On "Black Wednesday" in September 1992, the UK abandoned its ERM peg...and membership of the Euro was written off for good. 
 
The market won again this week, only in the other direction, on Violet Thursday.
 
But why now? Well, the European Central Bank meets next week. And after pussy-footing about since vowing to do "whatever it takes" in October 2012 (when gold priced in Euros again hit its record peak at €1380 per ounce), Mario Draghi and his team now find the data, electoral cycle and lawyers aligned.
 
Deflation is here, thanks to sinking oil prices. The Greek election, three days after next week's ECB decision, looks set to deliver the anti-austerity Syriza party to power. And there's nothing illegal about the ECB printing electronic cash to buy Eurozone assets, said the European Constitutional Court of Justice's advocate-general Pedro Cruz Villalon on Wednesday.
 
The Swiss National Bank pulled its ceiling from the Franc the very next day. Now or never on Euro QE, in short.
 
One guess is that the SNB had in fact done the Euro a favor back in 2011 when it started printing Francs to sell for Eurozone assets. Because the ECB wouldn't print Euros to buy Portuguese, Italian, Greek or other weak debt. So the SNB moved to avert disaster for its biggest trading partner. Now the ECB is about to start printing at last. So the SNB can step down from the task.
 
This would stand up if Eurozone assets had proved the biggest beneficiaries of Swiss QE cash. But no. Check the SNB's annual reports...and compare against its late-2014 breakdown of investment assets...and you'll see that Euro assets fell since 2010 from 55% of the total to just 45%...thanks to the Swiss buying Dollars, Sterling and Yen with their QE cash to depress the Franc's value on the FX market.
 
A better guess is that, after 3 years of holding the Franc down, the chaos that was certain to follow only grew worse with each day the peg remained in place. Better to get it over and done with than wait until after the ECB starts pushing the Euro still lower from its decade lows, dragging the pegged Franc with it and inviting yet more speculation that the peg would break in the end.
 
A third theory, put forward by Australia's ANZ Bank on Friday...and echoing what we told BullionVault clients in their Daily Update email Thursday morning...is that the SNB is suddenly much less willing "to be a major provider of safe haven investments."
 
Previously, speculators (and Russian oligarchs) had been able to buy 'safe haven' Francs at much depressed prices. Because the SNB had been keeping them cheap with that ceiling of CHF 1.20 per Euro. But that was getting politically tough (if not morally so, as Simon Derrick at BNY Mellon notes of the Russian inflows of cash during the latest Ruble Crash) after the anti-QE, pro-gold referendum held at the end of November.
 
Yes, the proposals to boost SNB gold holdings failed, thanks to being both bad policy and also wide open to accusations of simply trying to make gold owners rich. But it did hint at deeper discomfort amongst at least 1-in-4 Swiss citizens over the swollen central-bank balance sheet, and the gift to speculators which cheap Francs provided.
 
That gift paid off big-time on Thursday. The SNB's decision gave FX speculators (and Russian squillionaires) just the surge in Franc value they were betting on. But it also led the world deeper down the rabbit hole of negative interest rates. Because while the Swiss have abandoned a currency target, they're now targeting 3-month interest rates as low as minus 1.75% per annum.
 
So, the world's wealthy can hoard their savings in the 'safe haven' Swiss currency if they wish. But it will cost them, the SNB is saying. Holding cash will NOT be rewarded, even if the currency value rises.
"While the cost of holding gold is negligible, the Swiss 1-year deposit rate has fallen to -0.5% overnight," says ANZ. What's more, and while "for most participants, the yield on holding gold is effectively zero...for those who are able to lend the metal; a positive yield on physical holdings can be earned."
That sure beats Francs...unless the Franc keeps surging in value. In which case, as the SNB's announcement made plain on Thursday, a return to currency pegging is only ever one more press release away. 
 
So too is QE money printing by the Bank of England...and even the US Fed. The Swiss have now untied their Franc from the Euro because they clearly expect just such big QE news from the European Central Bank in Frankfurt next Thursday. So too does the gold price.
 
Are you all ready too?

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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