The Swiss vote ‘No’ – but there are good reasons to own gold

The Swiss have voted against returning to the gold standard. But it's only sensible to hold a bit of gold in your portfolio, says John Stepek. Here's why.


It was the last stand of the gold bugs. And now it's over.

On Sunday, the Swiss held a referendum on returning to the gold standard.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The Save our Swiss Gold' plan would have forced the Swiss National Bank the central bank to hold 20% of its reserves in gold. If that had happened, demand for gold would have surged, simply to meet the needs of the Swiss.

But in the end, 77% voted against the plan.

Advertisement - Article continues below

So is it time to ditch your gold?

Not at all. It might not like being told what to do with its reserves, but like most other central banks around the world, the Swiss Central Bank still holds some gold. And you should too.

The rational person's guide to owning gold

When people get emotionally engaged with their investments, they often turn into twits, to put it gently. They get stroppy and defensive and they refuse to listen to sensible arguments or to accept that the price of the object they love can go down as well as up.

Of course, gold also arouses equally strong reactions in some of those who don't own it. Lots of intelligent people simply don't get' gold. They'll quote the whole "barbarous relic" line from Keynes, and talk about how gold is only valuable because people believe it has value. It has no intrinsic' value.

Instead, they see the value of gold as being rooted in a psychological flaw in the rest of humanity. In short, "gold is worth something because all of these other idiots think it's worth something".

Willem Buiter from Citi put out a research note along these lines the other day just before the Swiss vote, arguing a little mischievously that gold was a 6,000-year bubble.

Advertisement - Article continues below

I don't have a lot of time for either extreme. There are sensible, rational reasons to owngoldas a portion of your portfolio, and it's got nothing to do with faith'.

Sensible, rational reasons to owngold

There's a reason for this. Gold is about the only asset in the world that has value independent of a counterparty.

Companies go bust shares and bonds follow. Governments go bust government bonds follow. Property is easy to confiscate (ask a wealthy Scots landowner how secure they feel right now go on, I dare you). And cash history is full of examples of currencies that have gone down the toilet.

A lump of gold has no counterparty. It's a lump of metal that most people throughout human history, and probably into the future, recognise as having value.

So when concerns about creditworthiness in the system reach breaking point which happens more often than market theories would predict gold comes into its own.

That's why it behaves differently to other assets. And that's what makes it a key part of a diversified portfolio.

Advertisement - Article continues below

Oh, and there's a reason why it's specifically gold that fulfils this function. It's not just because humans like shiny things. We aren't giant magpies.

Remember your periodic table from your chemistry lessons? (My apologies for any panic-stricken flashbacks that might trigger.)

To cut a long story short, very few of the elements on that table work as a long-term store of value. Gold works because it'll stay put (it's not a gas or a liquid under normal conditions). It's not going to give you radiation poisoning. It's very unreactive so it won't rust or rot.

In short, if as a species you have need of a reliable store of value, then gold works better than just about any other raw material.

So I think it's sensible for anyone to hold a small portion of their portfolio in gold between 5% and 10%, say. That's pretty much regardless of what else is going on.

There's another reason I'm hanging on to gold

The strong US dollar, the collapse in oil, and now the Swiss vote those are all negative for gold (gold and oil often move in the same direction, while gold and the US dollar often move opposite to one another).

Advertisement - Article continues below

But I've no intention of selling my holding of gold. There's always room for insurance in a portfolio, of course. But right now, I'm particularly keen to have some protection against disaster.

You see, broadly speaking, I'm very pleased about the slide in the oil price. But I'm also concerned that there's an outside chance that it could trigger the next financial crisis.

We'll have a more in-depth look at this topic in the next issue of MoneyWeek magazine, out this Friday. If you're not already a subscriber, get your first four issues free here.




Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

All the gold in China: money and power goes east

China has far more gold than official figures suggest – as much as America, in fact. He who owns the gold makes the rules, says Dominic Frisby.
15 Nov 2019

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020
UK Economy

How the coronavirus pandemic is killing cash

Covid-19 is making a huge difference to the way we live, work and do business. One of its less obvious effects, says Merryn Somerset Webb, is to accel…
31 Mar 2020