Posts Tagged 'Switzerland'

Is Insanity Breaking out in Switzerland?

The other day, I saw this item on Bloomberg.com “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.


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.

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