Is Insanity Breaking out in Switzerland?

The other day, I saw this item on “1500 Tons of Gold on the Line in Swiss Vote Buy Back Bullion.” Have a look:

There are people in Switzerland who resent that the country sold away much of its gold last decade. They may be a splinter group of Swiss politics, but they’re a persistent bunch.

And if they get their way in a referendum this month, these voters will make their presence known to gold traders around the world.

The proposal from the “Save Our Swiss Gold” proponents is simple: Force the central bank to build its bullion position up to at least 20 percent of total assets from 8 percent today. Holding 522 billion Swiss francs ($544 billion) of assets in its coffers, the Swiss National Bank would have to buy at least 1,500 tons of gold, costing about $56.3 billion at current prices, to get to the required threshold by 2019.

Those purchases, equal to about 7 percent of annual global demand, would trigger an 18 percent rally, giving a lift to gold bulls who’ve suffered 32 percent losses in the past two years, Bank of America Corp. estimates. With polls showing voters split before the Nov. 30 referendum, the SNB and national government are warning that such a move could undermine efforts to prevent the franc from surging against the euro and erode the bank’s annual dividend distribution to regional governments.

There they go again. The gold bugs are rallying to prop up the gold-price bubble with mandated purchases of the useless yellow metal so that it can be locked up to lie idle and inert in the vaults of the Swiss National Bank. How insane is that?

But wait! There is method to their madness.

A “yes” victory means Switzerland would face buying the metal at prices that quadrupled since it began selling more than half its reserves in 2000. The move would make the SNB the world’s third-biggest holder of gold. The initiative would also force the central bank to repatriate the 30 percent of its gold held abroad in the U.K. and Canada and bar it from ever selling bullion again.

With 1,040 metric tons, Switzerland is already the seventh-largest holder of gold by country, International Monetary Fund data show. According to UBS, a change in the law may force the SNB to buy about 1,500 tons, while ABN Amro Group NV and Societe Generale SA estimate the need at closer to 1,800 tons.

The SNB’s assets have expanded by more than a third in the past three years because of currency interventions to enforce a minimum exchange rate of 1.20 per euro. As of August, just under 8 percent of its assets were in gold, compared with a ratio of 15 percent for Germany‘s Bundesbank.

Many people get all bent out of shape at the mere mention of bailing out the banks and Wall Street, but those same people don’t seem to mind bailing out all those hedge funds and gold investment trusts, as well as all the individual investors, egged on by the Peter Schiffs of the world and by the sleazy characters advertising on Fox News and talk radio, who recklessly jumped on the gold bandwagon at the height of the gold bubble from 2008 to 2011.

Gold price tanking? No problemo. Just get the central banks to start buying all the gold now being dumped into the market by people who have finally realized that it’s time to cut their losses before prices fall even further. The price of gold having fallen by almost 20% from its 2014 high, a central-bank rescue operation looks awfully attractive to a lot of desperate people. Even better, the rescue operation can be dressed up and packaged as if it were the quintessence of monetary virtue, merely requiring central banks to hold gold backing for the paper money they issue.

Of course, this referendum, even if passed by Swiss electorate, is less than half as insane as the Monetary Law enacted in 1928, at the urging of the Bank of France, by the French Parliament, a law requiring the Bank to hold gold equal to at least 35% of its outstanding note issue. The Bank in its gold frenzy went way beyond its legal obligation to accumulate gold. The proposed Swiss Law is less than half as insane as the French Monetary Law of 1928, because in 1928 France and much of the rest of the world were either on the gold standard or about to rejoin the gold standard, so that increasing the demand for gold meant forcing the world into the deflationary death spiral that turned into the Great Depression. The most that the proposed Swiss Law could do is force Switzerland into a deflationary spiral.

That would be too bad for Switzerland, but probably not such a big deal for the rest of the world. If the Swiss want to lock up 1500 tons of gold in the vaults of their central bank, well, it’s their sovereign right to go insane. Luckily, the rest of the world has figured out how to have a monetary system in which the gyrations of the hyper-volatile gold price can no longer ruin the lives of many hundreds of millions, if not billions, of people.


22 Responses to “Is Insanity Breaking out in Switzerland?”

  1. 1 jlcaton November 6, 2014 at 6:17 pm

    I don’t see anything about a fixed exchange rate, so this may not be that problematic. This is a minimum reserve ratio, so problems might arise if the price of gold has big swings as it’s value will change the volume of gold required as reserves. If gold prices are forced up, then they can actually hold less gold.

    It seems like you are more upset about the rents gained from this, or no? Am I missing something?


  2. 2 jlcaton November 6, 2014 at 6:46 pm

    I reread and I saw that they have a peg to the euro. There may be a problem if euro devaluation causes the central bank to have to buy more gold.

    Still, I think the counter movement in gold price and reserve ratios make this complicated.


  3. 4 Tom Brown November 6, 2014 at 8:31 pm

    Nice post David. JP Koning has a post about gold bugs that I really enjoyed too recently:


  4. 5 doncoffin64 November 6, 2014 at 9:02 pm

    If this were FB, I’d click “Like.” As it is, all I ca say is that the legacy of the Insane Bank of France lives on.


  5. 6 andrew lainton November 6, 2014 at 10:25 pm

    Its even worse than that as the bank would be prevented from selling the gold, so it could not even be treated as an asset. It would be the equivalent of worsening the swiss balance of payments by 3% of GDP every year until the gold target is hit, exporting its wealth to the rest of the world.


  6. 7 Elsa Nasser November 7, 2014 at 2:58 am

    I am never sure why gold produces such strong reactions. While you imply that this is insane you have the advantage of having lived all of your life in a country with relatively stable money. The “insane” Banque de France is based in a country where two zeros had to be knocked off the currency because of the inflation that followed the break between the franc and gold. In Germany the currency has been wiped out twice in the last one hundred years. Presumably with the Swiss franc pegged to the Euro the Swiss Central Bank has been buying Euros to keep the exchange rate down. Would you prefer to hold Euros, a currency that may not last, or gold for the long term? In Great Britain a gold sovereign, the £1 gold coin that was in circulation before 1914, now retails at roughly £200. It’s true that a pound has only lost about 99% of its value since the break with gold so that a sovereign would trade at £100 rather than £200 if it’s price had simply risen in line with consumer prices.

    I’m not suggesting that it’s a great idea to buy gold right now, but I suspect that gold will still be used as a long term store of value long after the US has ceased to print US$1 bills, as it eventually will because their low value will no longer justify the printing cost.


  7. 8 Mike Sproul November 7, 2014 at 5:58 am

    A gold stock actually can stabilize a country’s currency. The trouble with most central banks is that their assets are denominated in the same currency that they issue. They try to “back a dollar with another dollar”. This creates a problem of inflationary feedback: The dollar loses some value, so the central bank’s bonds (denominated in dollars) lose value. But those bonds backed the dollar, so the dollar falls still more, the bonds fall more, etc. The more physical assets (like gold) that the central bank holds, the smaller is the inflationary feedback problem.


  8. 9 maynardGkeynes November 7, 2014 at 6:31 am

    How is it that the nefarious gold bugs and hedge funds can hoodwink Swiss voters to cast their ballots against the people’s own interests? David must think that that Swiss voters are as stupid as American voters.


  9. 10 Becky Hargrove November 7, 2014 at 6:49 am


    re “stupid” voters:
    It’s not that simple! There are some kind of underlying problems with Swiss asset structures if their population is even considering this vote.


  10. 11 elwailly November 7, 2014 at 7:58 am

    It seems to me that mandating the purchase of a certain amount of gold is simply QE in another form. It’s an expansionary move. In the current environment, who cares?

    There was no mention that the price of gold in Swiss currency should be pegged. (If the Swiss central bank doesn’t want to expand the money supply this much I’m sure they can balance it with other moves.)


  11. 12 Shahid November 7, 2014 at 2:31 pm

    This post only strengthens my belief that economic history should be made a must in economic teaching. Its been pushed aside to the corners by other zassy, attractive stuff like economic growth, budgets, poverty, etc,. Not that i am against teaching these, but i am against marginalizing an important aspect of economics.

    As David (and many others)have been pointing out time and again,if we had properly studied the Great Depression, the insane bank of France’s policies, the Gold standard and its mechanism, then there wouldn’t have been a vote like this Swiss one. I wonder why people don’t learn? And then i also wonder why economic history is not taken seriously?


  12. 13 Benjamin Cole November 7, 2014 at 10:08 pm

    Obviously the Swiss have gone nuts. They should be buying silver, and go back to a silver standard. Asthe Chinese thought for 1000 years, gold was a trinket/jewelry metal while silver was money.
    Silver also wears better than gold.


  13. 14 Max November 7, 2014 at 10:12 pm

    Mike, “The trouble with most central banks is that their assets are denominated in the same currency that they issue.”

    I’m surprised you think this is a problem. For a CB with a truly floating currency, like the Fed or ECB, safe own-currency loans are the safest assets. Gold or foreign currency is much more risky. So are stocks, or land, for that matter (see Japan).

    If the CB can shrink its balance sheet to zero whenever it wants, without taking losses, why would it need a pile of gold?

    The only argument for gold is one of diversification. In certain doomsday scenarios, gold may do relatively well.


  14. 15 Mikael November 8, 2014 at 4:23 am

    I agree that this is intellectually an absolutely idiotic proposition. However, the results might not be so bad, albeit unfair. If the Swiss central bank are required to hold the additional gold reserves in perpetuity, this ridicolous policy will effectively be a one time helicopter drop, which arguably is just what they need right now.


  15. 16 Mike Sproul November 8, 2014 at 7:14 am


    Suppose a bank has issued $100 in bank notes, against which it holds assets of 20 oz of silver, plus $80 worth of bonds (denominated in dollars). Define E as the exchange value of a dollar (oz./$). Setting assets (20 oz plus bonds worth 80E oz) equal to liabilities (dollars worth 100E oz) yields

    20+80E=100E, or E=1 oz/$

    The value of the dollar is no different than if the bank had held 100 oz as backing for $100, so as you say, dollar-denominated assets are not a problem, at least not so far.

    But suppose the bank is robbed of 10 oz (10% of its assets). The same equation becomes:

    10+80E=100E, or E=0.5 oz/$

    This is inflationary feedback at work. A 10% loss of assets caused the dollar to lose half its value. Note that if the bank had held 100 oz as backing for $100, the same loss would have caused the dollar to lose only 10% of its value. There would be no inflationary feedback in this case.

    So overall: While holding dollar-denominated assets does not necessarily affect the value of the dollar, it raises the potential volatility of the dollar.


  16. 17 jlcaton November 8, 2014 at 1:15 pm

    Some thoughts on a fixed reserve ratio under a commodity standard. The Swiss are headed in the right direction, but should abandon their predilection for gold.


  17. 18 sumnerbentley November 9, 2014 at 8:04 am

    David, Good post and this would be a bad idea. Hopefully it won’t pass. One small quibble; this mistake is unrelated to the mistake of pegging a currency to gold. The Swiss traditionally have pretty good monetary policy, and that would not change.


  18. 19 David Glasner November 9, 2014 at 7:52 pm

    Jim, You are right, the Swiss central bank is not bound by a fixed exchange rate between its currency and gold, so there is a basic difference between its position, even if the referendum passes, and the Bank of France. The post was mainly intended as a sendup of gold-buggism as a social-psychological phenomenon and only partly as a warning about the policy consequences should the referendum actually pass. However, I suspect that requiring 20% gold cover will make it more costly for Swiss National Bank to maintain a peg against the euro, and will therefore increase the deflationary pressure on the Swiss franc.

    Tom, Thanks.

    Don, Thanks. There is a like button by the way, but you are free to keep ignoring it.

    Andrew, I am not worried about the Swiss balance of payments, and I don’t think anyone else needs to worry about it either, but I take your point about the consequences on the asset portfolio of the central bank.

    Elsa, Imply? I thought that I was being pretty unequivocal. People don’t have to hold euros. They can use their euros to buy all kinds of assets that are likely to appreciate or generate pecuniary returns that will provide their owners with a much higher return than gold. Same goes for holding sterling or any other currency. Gold, thank God, is not the only inflation hedge.

    Mike, I don’t say that a central bank should not hold any gold, but gold is certainly not the only asset with the property that its value is not highly correlated with the value of the currency issued by the central bank.

    Maynard, A gold bug is a gold bug regardless of nationality.

    elwailly, QE is about the total size of the central banks’s balance sheet. The referendum is not about the size of the balance sheet but about its composition.

    Shahid, I agree.

    Benjamin, Well they haven’t voted yet, so don’t assume that they have gone nuts.

    Mikael, Why do you assume it’s a helicopter drop? They will convert their foreign exchange to gold. They don’t have to increase their outstanding liabilities.

    Jim, Thanks for the link. Interesting.

    Scott, As I pointed out in my initial response to Jim, I was mostly responding to gold-buggery as social-psychology, not to the policy implications. However, although you may be right that the Swiss may be able to continue with a reasonable policy even if the referendum passes, I do think that the referendum would increase the risks of deflation in Switzerland, which would not be a good thing.


  19. 20 Mikael November 9, 2014 at 8:53 pm

    David – I might have been too fast at commenting. If the question is about the composition of their balance sheet you’re absolutely right, they’ll just sell foreign exchange to buy gold. I assumed wrongly that it was purely about buying, and holding forever, 1500 tons of gold.

    I nevertheless need help wrapping my head around the resemblance between a gold peg and a requirement to hold x% of outstanding base money in gold. Intuitively it seems like such a requirement should force the hand of the central bank to conduct monetary policy. To tighten, sell gold for money, when gold appreciates and vice versa when gold depreciates. But you’re absolute right in that they don’t have to increase and decrease the balance sheet when buying/selling gold, which should give them the same level of policy autonomy. What’s your thought? Why do you think this policy would be deflationary?


  20. 21 David Glasner November 12, 2014 at 12:06 pm

    Mikael, The Swiss central bank pegs (weakly) the franc to the euro. To do that, the bank has to be willing to buy euros in unlimited quantities at the pegged exchange rate. But they can costlessly create more francs with which to buy euros. If there is a 20% gold cover requirement, they will have to use the euros, which can be invested in interest-earning securities and buy gold, which generates no interest (but carries a risk of appreciation or depreciation) and involves some transportation and storage costs to bring into bank’s vaults, so it may be that the bank will be less willing to continue pegging the franc to the euro after it is legally obligated to keep buying gold as it creates more francs. Also if the gold cover requirement increases the demand for Swiss francs, the bank may have to buy more euros than it would otherwise have had to buy to maintain the peg/


  21. 22 Mikael November 12, 2014 at 10:21 pm

    David, I still don’t see how a gold cover requirement changes the Swiss central bank’s autonomy over monetary policy. Technically, the Swiss central bank cannot buy euros in unlimited quantities, but only sell francs in unlimited quantities. The central bank can equally sell francs in unlimited quantities to buy gold, or any other asset for that matter. All assets carry a risk of appreciation or depreciation. However this has no effect on central bank monetary autonomy but only affects who benefits from monetary seigniorage, which is a fairness argument not one of monetary autonomy. The same goes for an interest earning central bank balance sheet or cost associated with its acquisition, it has no effect on monetary autonomy but only effects who pays for monetary expansion (the entity paying interest) and who benefits (the owner of the central bank receiving interest profits).

    Obviously if the gold cover requirement increases demand for Swiss franc, the policy will be deflationary. But that seems to be assuming the answer…


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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