Swiss gold referendum: A return to the gold standard

Why are the Swiss going to the polls?

Switzerland is holding a legally binding referendum at the end of this month on whether the central bank should be obliged to hold at least 20% of its overall reserves in gold bullion.

Frequent referendums are a familiar part of Swiss democracy; campaigners need to raise 100,000 signatures in support of their idea, and the proposal is put to a vote (see box). If voters agree with the current "Save Our Swiss Gold" proposals, the Swiss National Bank (SNB) would have to hold a fifth of its $547bn of assets in gold, compared to less than 8% now.

The SNB would also never again be allowed to sell any gold it owns, and all of the gold would have to be held in Switzerland. Currently, it holds about 20% of its reserves in the UK and 10% in Canada.

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What would the benefits be?

Proponents argue this gold-buying programme (which would return the SNB to a level of gold investment it followed as recently as 2009) would increase national security and provide a stronger underpinning to monetary policy: over the last five years, Switzerland has "printed" almost CHF400bn (£261bn) in order to keep the Swiss franc from strengthening against the euro. But the immediate beneficiary would probably be the gold price.

As tentative growth has returned to the global economy and stocks have rallied over recent years, gold has fallen from favour: it's languishing around four-year lows of less than $1,200 per ounce, having seen a massive sell-off in 2013, and an overall slump from its 2011 peaks of around $1,900. Hence many goldbugs are hoping that the Swiss vote yes'.

What does the Swiss central bank have to say?

The SNB is strongly opposed, on the grounds that the referendum proposal would severely limit their room for manoeuvre. "In times of crisis, it would vastly increase the portfolio's risk while vastly reducing its liquidity," reckons Sebastien Galy of Socit Gnrale. Some have put it even more strongly.

"The SNB won't be able to totally fulfil its legal mandate any more if it is accepted," according to Fritz Zurbrugg, a bank board member, in a Swiss newspaper interview. The consensus among analysts is that the Swiss are more likely to vote against the motion than for it.

But it's perfectly possible that it will indeed be passed: some opinion polls show a narrow majority in favour; some show a narrow majority against; there are still lots of don't knows, and campaigning is due to start in earnest this week.

How much gold is involved?

Currently, the Swiss hold some 1,040 metric tonnes of gold, making the country the seventh biggest holder. If the vote is passed and the law changed, the SNB would be forced to buy a further 1,500 tonnes (according to UBS), or even as much as 1,800 tonnes (as estimated by both ABN Amro and Socit Gnrale).

Even the lower figure would make Switzerland the world's third biggest holder of gold, behind only the US and Germany. Assuming a five-year timeframe for the purchases (as specified in the small print of the referendum proposal), that means they'd be buying 300 tonnes a year, roughly equal to the average amount investors put into exchange-traded gold products from 2003 to 2012.

According to estimates by the London-based World Gold Council, total global demand for gold in 2013 was 4,065.5 tonnes. So a Swiss yes' vote would be likely to boost global demand by something in the order of 7.5% a year.

How big would the effect be?

The precise effects on the gold market are hard to quantify, since they would depend to some extent on the timing of Switzerland's purchases, and whether the referendum's outcome was considered by the market to be permanent and binding.

But according to a projection by Bank of America analysts, Swiss purchases would trigger an 18% rally in the gold price (going some way to countering the slump of 32% seen over the past two years).

"It would have a major impact if it passes," reckons UBS analyst Joni Teves, speaking to Bloomberg. "If they do launch a buying programme, it would effectively have a constant bid in the market."

Why would it be constant?

Because of the commitment to hold a particular percentage, in this case 20%, of the SNB's overall assets in gold. That inflexibility means that if the price of gold drops, the central bank would have to increase the amount of gold it buys, in order to bring its weighting in gold back to 20%.

The effect of that, according to Socit Gnrale's Galy, "would be the equivalent of giving a large put to the market" in effect a lower limit on the gold price. Investors have "so far paid the vote little attention, but are now waking up to the risks", reckons The Wall Street Journal. It compares the situation to the last-minute market anxiety over the outcome of the independence referendum in Scotland.

A blizzard of referendums

In recent years, the Swiss have passed measures to ban the building of new minarets on mosques, introduce a new public holiday on 1 August, allow the state to give approved heroin to addicts, extend the opening hours of petrol stations and give shareholders greater legal rights to limit executive pay, among other things.

Ideas that have been put to a referendum but rejected include capping salaries at 12 times the lowest paid member of staff, scrapping compulsory military service, and adopting the highest minimum wage in the world. A poll on introducing a basic income is still to come.