Switzerland's gold referendum will force the SNB
central bank to buy more than it sold in 2000-2008...
The SWISS GOLD VOTE in November – "Should I be worried?" asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the
world-leading physical gold and silver exchange online.
It's no idle question. Governments do nasty things
when they need to buy or keep hold of an asset.
Witness the United States' compulsory gold purchase
of April 1933 for instance...and its ban on hoarding, exporting or trading
gold.
Big difference here is that the Swiss public gets to
vote on what drives such measures. Thanks to their petition system, the
country's junkies get
junk on prescription...while minarets are banned. The changes proposed for 30 November would compel the Swiss National
Bank to:
- hold
all its gold reserves in Switzerland;
- raise
gold holdings to 20% of the SNB's total assets;
- never
sell gold ever again.
This is a Swiss decision, and with the Franc
effectively "backed" by gold again if this passes, it's really not
for us British turkeys...earning and holding British Pounds Sterling...to say
whether or not a foreign nation should vote for Christmas.
But
let's put my hopeless idealism, and the economic wisdom (or otherwise) of
this 1930s-style Gold Standard proposal aside (for that is what it is). Just
how desperate might the Swiss authorities become if the vote passes? Put
another way, what impact might it have on the supply/demand balance
worldwide, and hence prices?
First,
the security of gold property held in Zurich or Bern, under the tarmac at
Kloten or beneath the Gotthard mountains. Switzerland is a highly open
economy, with financial services earning a huge portion of its tax revenues
and employing nearly 6% of the working age population. Its
banking reputation may have been dented in recent years (and its hard-won
bank secrecy laws look set to be crushed by the European Union kowtowing to the
US juggernaut). But physical gold storage, alongside refining imported gold
bullion for export, continues to be a crucial industry.
By
our reckoning, the world's investors added 1,400 tonnes of gold to private and bank vaults in
Switzerland between 2009 and 2013. For non-bank storage of physical property,
it remains by far the most popular choice amongst BullionVault
users, holding nearly 75% of the current record-high levels of client gold.
To the best of our knowledge, no country enjoying such revenue – nor any
state enjoying such confidence from foreign wealth – has ever turned it
away.
Even
during the UK's balance of payments' crisis of the 1970s, foreign-owned
bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of
gold. London of course remains the centre of bullion dealing worldwide, just
as Switzerland remains the No.1 choice for investment storage. It's very hard
indeed to see Switzerland attempting any kind of expropriation, compulsory
purchase, exchange controls or punitive taxation – most especially of
foreign-owned gold.
So,
with theft highly unlikely (especially against the popular pro-gold backdrop
of a successful referendum), might the SNB rush to buy gold in December after
the 30th November vote? Complicating factors start with the referendum
process itself. Next month's question gives no time limit for completing
the extra gold buying, nor for repatriation of existing stock from foreign
central-bank care. But if voters look harder (and they'll be urged to think
hard by the pro-gold billboard campaign set to start mid-November), then supporting
documents set a deadline of 2 years for bringing the current gold home, and 5
years for reaching that 20% target. However, the clock will start running
from the date of "acceptance". But is that acceptance by voters
(ie, November 30th) or by parliament and thus the regional cantons (ie, into
Swiss law)?
This
matters, because Swiss referenda, when approved by the public, can take up to
3 years to become law. So the whole process...if the SNB accepts its fate and
doesn't work with the government to refuse, reject or somehow revoke the
Swiss public's decision...could last up to 8 years.
Expect
delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did
so this month (invoking the threat
of deflation and Euro-led recession). Those policymakers are unelected,
so Switzerland's referendum pits popular, if not populist will against the
technocrats. But elected politicians also oppose the move (and by a wide margin). Even if
passed, in short, the spirit of the new rules will likely be hampered by
those people charged with enshrining and then enacting them.
The
SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years
from 27 Sept. this year, it obliges the 22 central banks involved to
"continue to coordinate their gold transactions so as to avoid market
disturbances." The expected transactions were of course sales (the first
CBGA was signed after the UK's sudden and clumsy gold sales announcement of
mid-1999), but this treaty only offers further cover for delaying, going
slow, or otherwise tempering the impact of buying.
An
object lesson in central-bank recaltricance is the repatriation of Germany's
gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank's plan announced in January 2013 is scheduled
for completion in 2020. Yet last year, only 5% of that total was shipped,
barely one-third the average run rate required. Whatever the reasons, there
really isn't any hurry, not for the central bankers involved at either end of
the transfer.
As
for retrieving Switzerland's current overseas gold holdings, we're given to
believe the Bank of England can "dig out" a 20-tonne shipment every
two days. So if 20% of the SNB's metal is still there in London, it could
expect to get back the UK holdings inside 1 month. But only if the Bank of
England devotes its entire vault staff to that task alone (it holds another
5,000 or so tonnes belonging to other customers besides the UK Treasury), and
only if central-banking's "old world" handshakes and winks are
thrown over to appease public opinion.
Again,
don't bet on it. Central bankers have fat brass necks when it comes to
defending themselves under cover of mutual independence from national
governments and their voting publics. So might history offer some clues to
the timing of Swiss buying?
Sucking
in foreign money around WWII, and with exchange controls blocking many
citizens abroad from buying investment bullion, Switzerland's own gold
reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales
starting 2000 took eight years to dispose of that much again, this time into
a bullish free market (and again, after a public vote). Now something around 220 tonnes per
year might be wanted – sizeable quantities to be sure, but in line with
recent sources of demand like gold miners buying back the huge forward sales
they'd made to insure against lower prices at the turn of the century
(dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth
rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
That
extra demand, however, came during a strong bull market in prices. Miner
dehedging in particular put a strong bid in the market, helping drive prices
higher both mechanically (see the spike
of early 2006 for instance) and psychologically (if gold-miner hedging
had been bad for investor sentiment, then de-hedging could only be good).
Many people now believe that forcing the SNB to hold 20% of its assets as
gold will clearly drive market prices higher. Added to the repatriation of
all Switzerland's existing gold reserves...which could catch the cosy world
of central banking asleep as Swiss law demands the gold is returned...it is
expected to spark a huge squeeze on physical supplies worldwide.
We're
not so sure. Heavy central-bank gold sales during the 1990s are widely held
to have pushed gold prices down. But those sales continued until the
financial crisis began. By then, gold prices were 3 times higher from their
lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy
purchases – this time by emerging-market states – then coincided with the
2011 peak. But again, those purchases have continued as prices fell steeply.
Yes,
back in 1998-2000, the Swiss gold sales discussed and then begun at the turn
of this century helped drive the final nails into gold's coffin-lid. But
sandbagging the price, and dismaying dealers (as well as "bitter
end" investors enduring the two-decade bear market starting with 1980's
peak at $850 per ounce), those huge sales in fact laid the floor for the
12-year bull market which followed.
Free
from central-bank vaults like no time since before the First World War, gold
rose and kept rising as private Western households, then Asian consumers,
money managers and emerging-market central banks joined the gold miners
themselves in buying bullion.
Gold
is nearly as rich in irony as it is in politics. If the Swiss pro-gold
campaign is trying to gerrymander a price-rise by forcing the SNB to turn
buyer, history may yet – we fear – have the last laugh.