Gold price could benefit from Swiss vote

Switzerland enjoys a rather more direct system of democracy than we do.

If you want some kind of constitutional change, and you can find 100,000 people prepared to support your proposal with their signature, you can get a referendum called.

If the majority then vote in your favour, the matter is then referred to the 26 cantons – the administrative regions (similar to our counties) – and if the majority too vote yes, you’ll get the change you were agitating for.

There’s a referendum coming up next month that could have huge ramifications for gold investors.

Private car ban

Some of the recent Swiss referendums have made me smile.

In 2003, there were demands that private cars be banned from all public places (including roads)  on certain Sundays of the year.

In 2012, there was an attempt to regulate book prices so that books would become “more affordable to all”.

Neither referendum was voted through by the Swiss. But over the last 25 years, some surprising initiatives have been voted into the constitution. Referendums have led to a national holiday on 1 August, government-approved heroin being given to addicts and the banning of the building of minarets (Islamic-style towers).

On 30 November, the Swiss will be voting whether to “Save our Swiss gold”.

What’s behind this movement?

Rather than dive straight in and tell you what the issues to be voted on are, let me give you some background first.

After the USA abandoned Bretton Woods in 1971, Switzerland was the last nation left on a gold standard. It seems Switzerland had to sever its golden ties if it wanted to join the International Monetary Fund, and in 1999, the decision to leave the gold standard was made. But only just – 12 of the 26 cantons voted against.

It was, I suppose, the final blow in the long, worldwide process to demonetise gold, which continued through the second half of the 20th century.

The Swiss decision came at around the same time as Gordon Brown sold two thirds of Britain’s gold at the bottom of the market. Swiss gold holdings in 1999 were about 2,600 tonnes – about 8% of global central bank gold reserves at the time. Even though gold was trading below $300 an ounce, that gold, according to the World Gold Council, amounted to almost 40% of Swiss foreign exchange reserves.

Over the next five years, Switzerland sold some 1,550 tonnes  (‘one tonne a day’ as the ‘yes’ campaign points out) – at between $300 and $500 an ounce. To put that into some kind of context, Gordon Brown ‘only’ sold 390 tonnes.

The proceeds of the sales were then distributed amongst the cantons and spent by them (no wonder they voted yes, say the cynics).

Now Switzerland has some 1,040 tonnes. Even with the gold price at $1,230 an ounce, that gold amounts to just 8% of its foreign exchange reserves.

“Save our Swiss gold” is, basically, a reaction to the fact that Switzerland has been an enormous dishoarder of gold, as this next chart from Grant Williams shows.

Central bank gold reserves chart

Save our Swiss Gold

The “Save our Swiss gold” campaign was started by Luzi Stamm, vice president of the Swiss People’s Party (SVP). It wants gold to become a core holding of the Swiss National Bank (SNB) once again and is making the following demands:

• The Swiss National Bank’s gold must be stored physically in Switzerland (currently about 70% is in Switzerland, 20% in the UK and 10% in Canada).

• The Swiss National Bank may not sell its gold reserves.

• The Swiss National Bank must hold at least 20% of its total assets in gold.

If (and that’s a very big if) the proposal is voted in, Switzerland will either have to buy a considerable amount of gold – around 1,400 tonnes – over a three-year period. Or it will have to sell down its other foreign exchange holdings. Or a bit of both.

Of course, that level of transparent physical buying is likely to be bullish for prices. 1,400 tonnes amounts to about half of last year’s total global production.

That 20% figure may seem unrealistic, but as recently as 2009, Switzerland had 20% of its foreign exchange holdings in gold. Since then, as we know, it has been aggressively buying euros and other fiat assets in order to suppress the price of the Swiss franc, which was deemed too high.

I must say, excited as I may be by the idea of all that gold buying, I am more excited by the potential psychological effects of a yes vote. In effect, this referendum is an attempt to send Switzerland towards some kind of gold standard – it’s a step towards the remonetisation of gold. The remonetisation of gold, should it ever happen, is what will eventually lead to the insane prices we gold bugs once used to dream of.

In addition, the order not to sell gold also makes it quite definite that gold is for hoarding, not selling value.  That too could change attitudes.

Finally, the order to repatriate overseas could also lead to other countries doing the same thing – which will resolve once and for all another story: this idea that gold held in central banks overseas isn’t actually there. If the gold is there, then it can be returned and all is well and good. But if it has been leased or sold – and all that gold price suppression stuff proves true – then you could well see the huge run on physical gold that some have been anticipating for a very long time.

All in all, the implications of this referendum – if it passes – as a catalyst for a change in attitude towards gold are considerable.

But how are the Swiss going to vote?

A majority is necessary for this initiative to have passage.

The most recent poll, conducted by the Swiss broadcaster SRG in conjunction with research institute, gfs.bern, found 44% in favour, 39% opposing and 17% undecided.

Polls are unreliable. We all know that. But the implication is that the ‘yes’ vote has to find another 7% from somewhere. With both the government and SNB both believed to be strongly in opposition, and a strong negative campaign expected from them in the coming weeks, I’d say that a win for the ‘yes’ vote is possible, but not probable.

Even if there is a ‘yes’ vote, it will then need to get through the cantons. The received wisdom is that probably won’t happen.

So, all in all, I would say it’s unrealistic for gold bugs to get their hopes up too high. At least, in the short term.

But the referendum will get people talking and thinking about the highly important subjects of money and central banking. If it’s close – as it seems it will be – people will start waking up.

I believe we are in the early stages of a period of huge political and economic change. The rise to prominence of the likes of Beppe Grillo, Nigel Farage and Russell Brand is one manifestation of that.

Electorates are disillusioned. Many have lost faith in their leaders. Technology is enabling people to do things they weren’t able to do half a generation ago. Something is brewing.

This Swiss referendum – like Scotland’s – is just one early skirmish in something much bigger.  This might all sound a bit political for an investment column – but gold, even today, is an extremely political investment, or rather an anti-political one. Political decisions could significantly affect its value.

As a trader, it’s hard for me to make a case for buying gold at the moment. It’s in a bear market. Yes, we may have hit the low at $1,180, but then again we may not have. Nobody really knows. A swing trader might be buying on the basis of extreme negative sentiment. But I’d like to see a clear uptrend in place before I start getting excited again.

But I’m certainly not selling any of my physical gold. I still believe that gold is going to be an extremely useful asset to own in the years ahead.

• Dominic Frisby is the author of Bitcoin: the Future of Money? The audiobook is available here.


• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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