‘Gold wars’ are intensifying with just 16 days left to polling day in the Swiss Gold Initiative.
‘The Gold Wars’ by Ferdinand Lips
The Swiss National Bank (SNB) and establishment parties went “all in” during the week and intensified their campaign. They suggested that passing the Gold Initiative would be a ‘fatal’ for Switzerland and would be positive only for speculators.
The ‘yes’ side countered by saying the SNB’s assertions were alarmist and over the top. They say that it is not an invitation to speculators as there would be a five year transition to gold being 20% of Swiss reserves. They warned that there is a real risk of another debt crisis and a global currency crisis and that gold reserves would protect the Swiss franc and the Swiss economy.
If the Swiss vote to revert to having 20% of currency reserves in gold, the Swiss National Bank will be forced to make huge purchases of gold bullion. Switzerland and its ‘Gold Initiative’ would contribute to driving the price of gold higher - likely in the short term and contributing to higher prices in the long term.
Understanding the important recent past and what has led to the forthcoming Swiss Gold Initiative is important and why we look at it today. This context is all important and is essential reading for all who wish to understand the key issues in the debate, for all who invest in and own gold internationally and for all Swiss people.
‘Gold Wars’ - The All Important Context and Gold Wars Today
By Ronan Manly,
Introduction
Golden Constant: Unchanging Swiss Reserves from 1971 to 2000
IMF Threat To Swiss Constitutional Gold
SNB Working Group - Begins Gold Lending
Solidarity Fund Confusion
SNB ‘Expert Group’ Pre Planned Sale Of “Excess” Gold Reserves?
Low Turnout Gold Referendum and New Constitution
Swiss Gold Expert Ferdinand Lips Speaks Up
Jean-Pierre Roth’s Important 20% Diversification ‘Rule of Thumb’
Introduction
Much of the background to the sale of Swiss gold reserves in the early 2000s relates back to a number of distinct episodes in Swiss monetary history in the 1990s.
A lot of this period was characterised by what in hindsight looks like coordinated planning on the part of the Swiss National Bank (SNB) to push through a specific figure of 1,300+ tonnes of Swiss gold sales, but which back then looked like an unconnected but bungled series of unrelated changes to Switzerland’s gold and monetary landscape.
Furthermore, it is only by reviewing this series of events that it’s possible to appreciate the genesis of the current Swiss Gold Initiative and the motivation of the proponents to call a halt to and try to reverse some of what they see as the unwise sale of Swiss gold due to decisions made in the 1990s.
Golden Constant: Unchanging Swiss Reserves from 1971 to 2000
Historically the Swiss Federal Constitution specified a gold backing for the country’s circulating currency. It did not specify a price at which to value the Swiss Franc in relation to gold.
This price was specified in related legislation. When the Bretton Woods system of fixed exchange rates collapsed in 1971 following the suspension by the US of dollar convertibility into gold, the Swiss parliament enacted legislation that linked the Swiss Franc to gold at an official price of SwF 4,590 per kilo (or SwF 142.90 per ounce). This price, at that time, was chosen as a realistic valuation price to enable the preservation of the gold backing for the Franc above a 40% limit (i.e. the value of the Swiss gold holdings at the official price exceeded, by a comfortable margin, 40% of the value of the circulating Swiss Franc currency).
Currency rules also stated that the Swiss National Bank (SNB) was only permitted to buy or sell gold within 1.5% of this official price. Therefore, from 1971 onwards, as the price of gold rose far above this official price, the Swiss National Bank (SNB) was unable to buy or sell gold. This is why Swiss gold reserves remained virtually unchanged at 2,590 tonnes between 1971 to 2000.
IMF Threat To Swiss Constitutional Gold
In 1992, after a concerted political campaign spearheaded by some of the country’s political parties, Switzerland joined the International Monetary Fund following a national referendum.
Under IMF rules, adopted in the latter part of the 1970s, IMF member countries cannot link their currencies to gold. After joining the IMF, Switzerland was therefore constrained in how it could subsequently revalue its gold reserves since IMF Articles of Association prohibited IMF member countries from linking their currencies to gold.
In June 1995, at a gold conference in Lugano, Switzerland, Jean Zwahlen, one of the three members of the Governing Board of the SNB at that time, told the conference that “to state it bluntly, the Swiss National Bank has no intention whatsoever to sell or mobilise its gold reserves.(1)” At the end of April 1996, Zwahlen left the SNB to take up various private sector board positions (2).
However, in April 1996, Governing Board Chairman, Markus Lusser, set the Swiss gold reserve changes in motion, when he referred to the 40% gold cover as a ‘relic of the past’. (3) Lusser, who been SNB chairman since 1988, then also left the bank at the end of April 1996. (4)
SNB Working Group - Begins Gold Lending
In June 1996, an eight member ‘Working Group’ was appointed by the SNB and Ministry of Finance to purportedly examine the SNB’s investment policy, and to come up with ways of increasing the profitability of the Bank’s reserves. The group appointed consisted exclusively of SNB and Swiss Ministry of Finance officials, and was co-chaired by Peter Klauser, chief legal counsel at the SNB, and Ulrich Gygi from the Swiss Finance Ministry.
Gold sales were supposedly outside the terms of reference of this group.
This group targeted the gold cover rules so as to free up part of the gold reserves in order to start gold lending / leasing operations. By 1996, the gold cover of the Swiss Franc note issue had fallen to just a few percentage points above the minimum 40% level (i.e. the value of the Swiss gold reserves using the old official valuation price only just exceeded 40% of the value of outstanding Swiss Franc currency in circulation).
A change to this cover level only needed legislative and not constitutional approval, so in November 1996, the working group indicated that the gold cover should be reduced from 40% to 25%, and they published these recommendations in a report in December 1996. The portion of the gold reserves not earmarked to cover the note issue could therefore be targeted for gold lending. The group recommended a maximum of 10% of gold reserves to be used in this way, which worked out at a maximum of 259 tonnes of the total 2,590 tonnes.
These changes were ultimately reflected in legislation in November 1997, and as soon as the legislation went through the SNB began its gold lending operations, presumably out of London where most gold lending takes place in conjunction with the LBMA bullion banks.
Solidarity Fund Confusion
On 5th March 1997, the Swiss government announced that they intended to create a humanitarian Fund or Solidarity Fund, to be funded by Swiss gold. This proposal was said to have been conceived by SNB President Hans Meyer for what looks like no compelling reason, and communicated to Swiss President Arnold Koller and Federal Councillor Kaspar Villiger, who then echoed it back as if it had been their idea (5)(6).
On the same day, 5th of March 1997, the SNB announced that they supported this move by the Swiss government. The proposal was to transfer between 400 and 600 tonnes from the Swiss gold reserves to this Swiss Solidarity Fund, and then sell the gold over a 10 year period.
Note that this Solidarity Fund was not specifically related to US led pressure at that time for Swiss compensation for WWII related incidents, but in the confusing political climate at that time in the 1900s and the pressure on the Swiss banks, it was sometimes confused with WWII related compensation.
At the April 1997 SNB annual general meeting, Hans Meyer, the new chairman of the SNB governing board (7) talked in terms of a 400 tonne transfer of gold to the Solidarity Fund, and even suggested that this gold could stay in the care of the SNB but be administered on an executor basis. This was the first time that Swiss gold sales were quantitated and only 400 tonnes was mentioned.
However, behind the scenes and just over the horizon, the SNB had more substantial plans for the gold reserves.
This Solidarity Fund idea never really gained momentum in Switzerland; in fact it was received by the Swiss public with a lot less than enthusiasm and eventually fizzled out. But what it did do was confuse the citizenry about Swiss gold sales and about referenda during a period in which there were multiple different proposals being discussed by the Swiss political and monetary establishment in and around the topics of gold and currency.
SNB ‘Expert Group’ Pre Planned Sale Of “Excess” Gold Reserves?
A second joint group called the ‘Expert Group’ was appointed in April 1997, again the appointment was by the SNB and the Ministry of Finance and again the group was co-headed by the SNB’s Peter Klauser, and the MinFin’s Ulrich Gygi.
This was a ten member group but five of the members had also been on the first ‘Working Group’. This time around three university academics with constitutional experience were thrown in for good measure but the rest of the panel were from the SNB and the Finance Ministry. The brief of this group was to recommend ways to reform the Swiss monetary system. After supposedly analysing and deliberating, this group’s recommendations included the following:
- Remove the reference to gold backing from the constitution thereby severing the constitutional link between the Swiss franc and gold. Revalue the gold reserves to a higher level but below market value.
- Officially grant the Swiss National Bank total independence by writing this stipulation into the constitution. This independence proposal from the SNB was despite the fact that the Bank had been, de facto, independent since its formation in 1906.
- Make price stability the main priority of the SNB, above and beyond other objectives.
It’s hard to believe that this Expert Group did any independent analysis, since it ended up arriving at conclusions in 1997 uncannily like the SNB’s Peter Klauser had listed in a speech he gave in 1996. As the World Gold Council put it in a 1998 publication:
“Indeed, Dr. Klauser laid out a similar plan to the one proposed by the Expert Group in a speech he gave the day after the Working Group issued its report (18 November 1996) – that is, six months before the appointment of the Expert Group (April 1997).”
Swiss Gold Initiative Logo
The fact that this Expert Group came up with recommendations in 1997 that were in line with what the SNB was trying to push in 1996, to a large extent shows that this entire exercise was pre-planned by the SNB from at least as early as 1996.
The Expert Group also specifically recommended on what they called ‘excess’ gold reserves, and this is crucial to understanding how the subsequent massive gold sales plan of 1300 - 1400 tonnes was put on the table. In what looks very like a classic case of reverse engineering, the Expert Group recommended an upward revaluation in the price of gold from the old official price of SwF 4,590/kg ($96.40 per ounce) to SwF 9,000 / kg, ($189 per ounce).
This SwF 9,000 price was 60% of the market price at that time but there was no specific ‘scientific’ reason why this price was chosen above any other price. Basically, the ‘Experts’ stated that Switzerland needed SwF 10.7 billion in gold as part of its total reserves, which, at a price of SwF 9000, would be equal to 1,200 tonnes. So that left 1,400 tonnes in excess that could be labelled as saleable.
Shockingly, the Expert Group’s recommendations for the wording of the new constitution did not even mention gold, so there was some push back from the Swiss Parliament who made the Expert Group insert a reference to gold in the wording of the new Constitution in relation to reserves. But in the new wording there was no quantification of the amount of gold that should be held in future, it just referred to “a part of it in gold”.
Low Turnout Gold Referendum and New Constitution
The above changes required a new constitution and a national referendum and also changes to Swiss legislation. At the end of May 1998, the Swiss Federal Ministry of Finance published a press release announcing constitutional changes to reflect the above, stating that “the link between the Swiss franc and gold, written in the constitution, limits the possibility of gold sales for the SNB and should therefore be dropped”.
In a revealing sentence, the Finance Ministry also stated that “According to the SNB, other than current foreign exchange reserves, management of monetary policy only requires about half the current level of gold reserves”. This statement is revealing since it indicates that the Finance Ministry perceived the Expert Group essentially to be the SNB (8) grouping, and not a more diverse representative grouping.
To coincide with the above press release, the World Gold Council (WGC) also released analysis at the end of May 1998 stating that over the previous two weeks they had engaged in “extensive interviews with principal Swiss monetary and financial officials”. The WGCs actions were partially to allay fears in the market over what at the time was a lot of uncertainty surrounding the size and timing of any Swiss gold sales.
The WGC stated at the time that, based on their discussions, the definition of total excess gold was roughly 1400 tonnes, that if any gold was sold then it would be over a 10-20 year period, and that this would work out at between 50 and 100 tonnes per year.
The national referendum on the new Swiss constitution went ahead in April 1999, and was passed by just under 60% of voters in what was a very low turnout of 36% of the electorate.
From 1400 Tonnes to 1300 Tonnes and CBGA
Sometime between mid-1998 and early 1999, the SNB’s target of an excess 1,400 tonnes of gold reserves somehow became a discussion focusing on an excess of 1,300 tonnes of gold.
Why this figure changed is not clear, however, a World Gold Council study at the time in April 1999 stated that “1,400 tonnes was the figure first mentioned. However, in Switzerland, the discussion has since been firmly fixed on 1,300 tonnes. For consistency we have followed Swiss practice.”
Surprising as it may sound now, as of April 1999, there was no clarity amongst gold market observers as to whether there would be any Swiss gold sales and if so, when this would happen. The Swiss Federal Government was still confusing Swiss citizens with the apparent red herring about a Swiss Solidarity Fund funded by Swiss gold sales.
Then suddenly on 26 September 1999, an agreement on coordinated gold sales between 15 European central banks, known as the Central Bank Gold Agreement (CBGA), or Washington Agreement, was announced out of the blue in a move that surprised the gold market. The signatories to the agreement were the 11 Eurozone economics at that time, as well as Switzerland, the UK, Sweden and the European Central Bank.
It was known as the Washington agreement since it had been signed at the annual IMF/World Bank meeting which was held in Washington DC that year.
The Agreement, which would likely have taken months to plan, allowed for the sale of up to 2000 tonnes of gold over a five year period from 2000 until 2004, amongst the signatory central banks. Within the agreement, Switzerland was conveniently given a full allocation of the 1,300 tonnes of gold that it had unscientifically deemed to be in ‘excess’. At the time, it was said that the Washington Agreement was to be monitored by the Bank for International Settlements (BIS) in Basel, Switzerland.
What the CBGA was purportedly drawn up for was to create gold price stability in a market where talk of gold sales by various central banks, including Switzerland, was said to have created a destabilising influence.
What the agreement did do however, especially in the case of Switzerland, was to allow the Swiss National Bank to plough full-steam ahead into an accelerated five year sales program of 1,300 tonnes of gold sales (some 260 tonnes per year) that a few months previously was still being debated and which the Swiss Finance Ministry had said would take place over 10-20 years at 50-100 tonnes per year if it actually went ahead at all.
Swiss Gold Expert Ferdinand Lips Speaks Up
Critics of the SNB’s rush to sign the Washington Agreement in September 1999 point to the fact that the Swiss Parliament hadn’t even passed legislation to authorise Swiss gold sales until December1999, and also that, under Swiss law, there was a possibility that a referendum could have been scheduled for April 2000 to question these sales.
This referendum did not take place and so the SNB was then unfettered to commence gold sales in May 2000, which it promptly did. The SNB officially then went on to sell 1,300 tonnes of Swiss gold between 2000 and 2004.
This was a very substantial amount of gold - some 325 tonnes per year and likely contributed to gold’s weakness in the early part of the decade.
Well known Swiss banker, financial adviser and author of ‘Gold Wars’ Ferdinand Lips believed that Switzerland had been put under enormous foreign pressure and duress to sell half of its gold reserves, and he wrote in 2002 questioning “Is the SNB on New York’s leash?”, saying that “In my opinion, the once strong, proud and independent SNB has been degraded to an ‘Off-shore Branch’ of the U.S. central bank (the Federal Reserve) and reports directly to Alan Greenspan and his cohorts in New York.”
Ferdinand Lips - Author of ‘Gold Wars’
Lips added that “It is a given that the Swiss gold sales will help New York money center banks to survive a bit longer. It will help them manipulate the gold market. But, gold’s time is still to come. If the SNB does not stop its sales, Switzerland will have to buy back its gold one day but at a higher price. The question is: With what?”(10)
Lips’ question still seems as relevant today as it did in 2002, and may need an answer sooner than anyone thought possible depending on the outcome of the 30 November referendum.
Jean-Pierre Roth’s Important 20% Diversification ‘Rule of Thumb’
One final point to note is that with the upcoming Swiss Gold Initiative referendum stipulating that the SNB should be required to hold at least 20% of its reserves in gold, it’s worth noting that in June 2000, Jean-Pierre Roth (11), the then deputy governor of the SNB, told the World Gold Council that this exact percentage, 20% of reserves in gold, made a lot of sense from a reserve diversification perspective.
Roth said:
“The down-sizing of our gold reserves is limited to 1,300 tonnes. We have no intention to go further than that. At the end of our sales programme, the remaining 1,290 tonnes of gold in our possession will be appropriate in several respects: our gold reserves will represent about 20 per cent of our total assets, which makes a great deal of sense from a diversification point of view. It also meets our constitutional obligation to maintain our gold reserves.
Also, they will back about half of the currency in circulation in Switzerland. A strong gold backing still plays an important role in fostering the public’s confidence in money. They will form a sizeable ‘second line of defence’ without credit, transfer or political risks, to be used in case of emergencies.(12)
Roth went on to become chairman of the governing board of the Swiss National Bank for nine yearsbetween January 2001 and December 2009.
Conclusion
With the SNB now in full media mode arguing against a 20% gold holding in the reserves, perhaps some of the Swiss media might care to interview Dr. Roth who can now be found sitting on the boards of Nestlé, Swiss Re and Swatch.
Given that the 1,300 tonnes of gold sales appear to have been pre-planned by the SNB from approximately the mid-1990s, and given that the gold initiative referendum is about to be put to a public vote in just 16 days, it would be valuable at this juncture to now pose some questions to former Swiss National Bank executives in an effort to understand exactly what went on with the gold sales plans and negotiations during the late 1990s.
Swiss Gold Initiative donations can be madehere
Notes
[1] Gold Wars, Page 184 http://www.fame.org/PDF/Gold%20Wars%200-97103...%2001.21.02.pdf
[2] Jean Zwahlen target="_blank" http://www.snb.ch/en/mmr/reference/hist_bi...ce/hist_bios...
[3] World Gold Coun target="_blank"cil http://www.gold.org/download/file/2917/..._19_Q1_1997.pdf
[4] Markus L target="_blank"usser: http://www.snb.ch/en/mmr/reference/h...e/hist_bios_...
[5] G target="_blank"old Wars: http://www.fame.org/PDF/Gold%20Wa...%2001.21.02.pdf
[6] WGC target="_blank"via USA Gold http://www.usagold.com/swissgoldwgc.html
[7] target="_blank" Hans Meyer: http://www.snb.ch/en/mmr/refer.../hist_bios_d...
[8] Wor target="_blank"ld Gold Council http://www.gold.org/downloa...2795/280598.pdf
[9] Switzerland's gold: Ten key questions about Switzerland's gold - An examination by the World Gold Council. April 2009, Rep target="_blank"rinted at USAGOLD: http://www.usagold.com/s...issgoldwgc.html
[10] Freedom Is Lost in Small Steps - Ferdinand Lips http://lips-institute.ch/en/wp-content/uploads/file/articles_pdf/FreedomIsLost.pdf.pdf
[ target="_blank"10] Jean-Pierre Roth: http://www.snb.ch/en/...ist_bios_dm_...
[12] WGC -
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MARKET UPDATE
Today’s AM fix was USD 1,154.00, EUR 926.31 and GBP 736.20 per ounce.
Yesterday’s AM fix was USD 1,161.00, EUR 930.81 and GBP 736.26 per ounce.
Gold climbed $1.70 or 0.15% to $1,161.80/oz yesterday. Silver fell $0.06 or 0.38% to $15.61/oz.
Gold for immediate delivery lost 0.8% to $1,153.50/oz in late morning trade in London. It reached $1,132.16 last Friday, November 7, the lowest since April 2010.
Gold, for the moment, is taking its signal and remaining weak due to the resurgent dollar and buoyant and bubbling stock markets (see char target="_blank"t below).
S&P 500 - 20 Years (Thomson Reuters)
There are lots of important economic data points in the coming week including US October industrial output, US PPI & CPI, Germany ZEW and China HSBC Flash November Mfg PMI.
Negative numbers, particularly weak industrial output and higher than expected inflation would likely see gold supported and could even see a safe haven bid and short covering rally.
More dovish than expected FOMC Minutes could also support gold. Hawkish minutes could lead to further weakness and gold testing the next level of support at $ target="_blank"1,100/oz.
Gold in U.S. Dollars - 10 Years (Thomson Reuters)
Gold remains very vulnerable and further declines to $1,000/oz are quite possible. Though the momentum of the selling seems to have abated somewhat, momentum is a powerful thing and the short term trend remains down.
Three important factors which should support gold above $1,100/oz are Chinese demand, central bank demand including from Russia and of course the Swiss Gold Referendum.
Chinese SGE Gold withdrawals for the week were at 54.19 tonnes suggesting Chinese gold demand is more robust than target="_blank"thought.
Chinese SGE Weekly Gold Withdrawals at 54.19 tonnes
Questions are being asked about whether Chinese demand has actually fallen as the WGC suggest.
They appear to be only viewing Chinese demand through the rather narrow prism of Hong Kong exports to China. However, today China is importing huge volumes of gold bullion from all over the world and therefore deliveries on the Shanghai Gold Exchange are a much better benchmark of real Chines target="_blank"e demand.
Silver in U.S. Dollars - 10 Years (Thomson Reuters)
Russia, according to the latest data from The World Gold Council (WGC) has continued to buy significant amounts of gold. Dwarfing the rest of the world's buying in Q3, Russia added a large 55 tonnes target="_blank" to its reserves.
The Telegraph reports that Putin is taking advantage of lower gold prices to pack the vaults of Russia's central bank with bullion as it prepares for the possibility of a long, drawn-out economic w target="_blank"ar with the West.
Russia bought more gold in Q3 then all other countries combined...
It is not just Russia buying gold. So too are ex Soviet States which are aligned with Russia. Meanwhile, the People’s Bank of China quietly continues to stealth diversify its reserves into gold.
The Swiss gold referendum is in just 16 days and volatility is likely to pick up ahead of the big vote. A 'no' vote is still more likely than a 'yes' vote but the results will likely be very close.
There is much dissatisfaction with politicians amongst voters in the western world. Indeed, there is a distrust of banks and bankers. The Swiss people are stubbornly independent and quite contrarian by nature. Also there is the important fact that there is a another vote on the same day about immigration in Switzerland and this is likely to bring out more conservative voters who may vote for the Swiss Gold Initiative.
All in all it promises to very interesting and very close and should result in volatility in the gold market.
Should there be a sense that the yes side may win then we would expect gold to recover from its recent bout weakness and test $1,200/oz again.
We remain bearish in the short term but very bullish for 2015 and in the coming years.
Read Essential Guide to Gold Storage in Switzerland
