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Last week the Swiss National Bank
suddenly announced that it was “no longer going to tolerate a EUR/CHF
exchange rate below the minimum rate of CHF1.20”. Just before the
announcement the franc had been trading at CHF1.10, so it represented a
devaluation of about 9%. The Swiss Franc had been as strong as parity about a
month before the move, so the decision appears to have been based on more
than simple currency over-valuation.
The SNB
definitely has a problem. Switzerland is a successful economy surrounded by
nations in a currency union that threatens to disintegrate. Essentially,
Switzerland’s success is out of step with the rest of Europe. This is
obvious, but the motivations for central banks are rarely stated plainly, and
there is usually more to an action such as this than meets the eye.
It was
gold’s reaction to the news that surprised everyone, because gold fell
$60 from its high at the time of the announcement, when the SNB’s
action was expected to be good for gold. Half the fall in the gold price
occurred in the few minutes ahead of the SNB’s announcement at 10.00am
European time, so it appears that the gold price was getting some guidance
from the central banks. Furthermore, very late that evening US time, when
trade is thin and Europe was asleep someone dumped 4,000 futures contracts,
driving the price down over $50 to $1,816. The first trade was on privileged
information, while the second was clearly timed for maximum effect.
Rarely do
we see such a public determination to hit the gold price. Indeed, the
promptness of the action suggests that the move on the Swiss franc was
designed to get the gold price down as much as it was the franc itself. If this
is the case, then there must be a good reason, and we should bear in mind
that the central banks have it in their interest to reduce volatility in
bullion markets as well as currencies.
In common
with dealers and market makers in all markets, bullion traders run short
positions in bull markets. The turnover on the bullion markets is massive,
and a dealer active on behalf of its customers and its own trading book can
make substantial dealing profits. So long as those profits exceed the losses
on their short positions, all is well. This is why the greatest threat to the
bullion market is not the bull market itself, but prices rising too rapidly.
In the last
two months, the market for gold has been particularly strong, erasing trading
profits for many bullion dealers. Central bankers see this as the result of
financial flows building due to the difficulties in the euro area. The
targets for these flows out of the euro are the Swiss franc and gold, so the
SNB’s move is designed to take the heat out of both of them.
Attempts to
keep the price of gold down are unlikely to succeed for long. Westerners who
buy gold may be unhelpful to the central banks, but you cannot stop a few
hundred million Chinese and Indians from protecting their hard-earned
savings. And the Chinese are busy developing their bullion markets, taking
control away from the Western central banking cartel.
Alasdair
McLeod
Article originally
published at Goldmoney here
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