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Swiss Gold Vote: Should You Be Worried?

Switzerland's gold referendum will force the SNB central bank to buy more than it sold in 2000-2008...
 
The SWISS GOLD VOTE in November – "Should I be worried?" asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the world-leading physical gold and silver exchange online.
 
It's no idle question. Governments do nasty things when they need to buy or keep hold of an asset.
 
Witness the United States' compulsory gold purchase of April 1933 for instance...and its ban on hoarding, exporting or trading gold. 
 
Big difference here is that the Swiss public gets to vote on what drives such measures. Thanks to their petition system, the country's junkies get junk on prescription...while minarets are banned. The changes proposed for 30 November would compel the Swiss National Bank to:
  • hold all its gold reserves in Switzerland; 
  • raise gold holdings to 20% of the SNB's total assets; 
  • never sell gold ever again. 
This is a Swiss decision, and with the Franc effectively "backed" by gold again if this passes, it's really not for us British turkeys...earning and holding British Pounds Sterling...to say whether or not a foreign nation should vote for Christmas.
 
But personally speaking, I'm no fan of central-bank gold hoarding. It tends to mark dark times, and still darker plans on the part of government.
 
The Swiss government is in fact pitted against this new gold plan. But still, it's better by far to let gold circulate freely, I believe...outside state vaults and in private hands...just like the truly classical Gold Standard worked.
 
But let's put my hopeless idealism, and the economic wisdom (or otherwise) of this 1930s-style Gold Standard proposal aside (for that is what it is). Just how desperate might the Swiss authorities become if the vote passes? Put another way, what impact might it have on the supply/demand balance worldwide, and hence prices?
 
First, the security of gold property held in Zurich or Bern, under the tarmac at Kloten or beneath the Gotthard mountains. Switzerland is a highly open economy, with financial services earning a huge portion of its tax revenues and employing nearly 6% of the working age population. Its banking reputation may have been dented in recent years (and its hard-won bank secrecy laws look set to be crushed by the European Union kowtowing to the US juggernaut). But physical gold storage, alongside refining imported gold bullion for export, continues to be a crucial industry.
 
By our reckoning, the world's investors added 1,400 tonnes of gold to private and bank vaults in Switzerland between 2009 and 2013. For non-bank storage of physical property, it remains by far the most popular choice amongst BullionVault users, holding nearly 75% of the current record-high levels of client gold. To the best of our knowledge, no country enjoying such revenue – nor any state enjoying such confidence from foreign wealth – has ever turned it away. 
 
Even during the UK's balance of payments' crisis of the 1970s, foreign-owned bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of gold. London of course remains the centre of bullion dealing worldwide, just as Switzerland remains the No.1 choice for investment storage. It's very hard indeed to see Switzerland attempting any kind of expropriation, compulsory purchase, exchange controls or punitive taxation – most especially of foreign-owned gold. 
 
So, with theft highly unlikely (especially against the popular pro-gold backdrop of a successful referendum), might the SNB rush to buy gold in December after the 30th November vote? Complicating factors start with the referendum process itself. Next month's question gives no time limit for completing the extra gold buying, nor for repatriation of existing stock from foreign central-bank care. But if voters look harder (and they'll be urged to think hard by the pro-gold billboard campaign set to start mid-November), then supporting documents set a deadline of 2 years for bringing the current gold home, and 5 years for reaching that 20% target. However, the clock will start running from the date of "acceptance". But is that acceptance by voters (ie, November 30th) or by parliament and thus the regional cantons (ie, into Swiss law)?
 
This matters, because Swiss referenda, when approved by the public, can take up to 3 years to become law. So the whole process...if the SNB accepts its fate and doesn't work with the government to refuse, reject or somehow revoke the Swiss public's decision...could last up to 8 years.
 
Expect delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did so this month (invoking the threat of deflation and Euro-led recession). Those policymakers are unelected, so Switzerland's referendum pits popular, if not populist will against the technocrats. But elected politicians also oppose the move (and by a wide margin). Even if passed, in short, the spirit of the new rules will likely be hampered by those people charged with enshrining and then enacting them. 
 
The SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years from 27 Sept. this year, it obliges the 22 central banks involved to "continue to coordinate their gold transactions so as to avoid market disturbances." The expected transactions were of course sales (the first CBGA was signed after the UK's sudden and clumsy gold sales announcement of mid-1999), but this treaty only offers further cover for delaying, going slow, or otherwise tempering the impact of buying.
 
An object lesson in central-bank recaltricance is the repatriation of Germany's gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank's plan announced in January 2013 is scheduled for completion in 2020. Yet last year, only 5% of that total was shipped, barely one-third the average run rate required. Whatever the reasons, there really isn't any hurry, not for the central bankers involved at either end of the transfer.
 
As for retrieving Switzerland's current overseas gold holdings, we're given to believe the Bank of England can "dig out" a 20-tonne shipment every two days. So if 20% of the SNB's metal is still there in London, it could expect to get back the UK holdings inside 1 month. But only if the Bank of England devotes its entire vault staff to that task alone (it holds another 5,000 or so tonnes belonging to other customers besides the UK Treasury), and only if central-banking's "old world" handshakes and winks are thrown over to appease public opinion.
 
Again, don't bet on it. Central bankers have fat brass necks when it comes to defending themselves under cover of mutual independence from national governments and their voting publics. So might history offer some clues to the timing of Swiss buying?
 
Sucking in foreign money around WWII, and with exchange controls blocking many citizens abroad from buying investment bullion, Switzerland's own gold reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales starting 2000 took eight years to dispose of that much again, this time into a bullish free market (and again, after a public vote). Now something around 220 tonnes per year might be wanted – sizeable quantities to be sure, but in line with recent sources of demand like gold miners buying back the huge forward sales they'd made to insure against lower prices at the turn of the century (dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
 
That extra demand, however, came during a strong bull market in prices. Miner dehedging in particular put a strong bid in the market, helping drive prices higher both mechanically (see the spike of early 2006 for instance) and psychologically (if gold-miner hedging had been bad for investor sentiment, then de-hedging could only be good). Many people now believe that forcing the SNB to hold 20% of its assets as gold will clearly drive market prices higher. Added to the repatriation of all Switzerland's existing gold reserves...which could catch the cosy world of central banking asleep as Swiss law demands the gold is returned...it is expected to spark a huge squeeze on physical supplies worldwide.
 
We're not so sure. Heavy central-bank gold sales during the 1990s are widely held to have pushed gold prices down. But those sales continued until the financial crisis began. By then, gold prices were 3 times higher from their lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy purchases – this time by emerging-market states – then coincided with the 2011 peak. But again, those purchases have continued as prices fell steeply.
 
Yes, back in 1998-2000, the Swiss gold sales discussed and then begun at the turn of this century helped drive the final nails into gold's coffin-lid. But sandbagging the price, and dismaying dealers (as well as "bitter end" investors enduring the two-decade bear market starting with 1980's peak at $850 per ounce), those huge sales in fact laid the floor for the 12-year bull market which followed.
 
Free from central-bank vaults like no time since before the First World War, gold rose and kept rising as private Western households, then Asian consumers, money managers and emerging-market central banks joined the gold miners themselves in buying bullion.
 
Gold is nearly as rich in irony as it is in politics. If the Swiss pro-gold campaign is trying to gerrymander a price-rise by forcing the SNB to turn buyer, history may yet – we fear – have the last laugh.

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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