Next month Switzerland will vote in the so-called “Save our Swiss Gold” referendum.
BANGKOK: — Like last month’s vote on Scottish independence, where the United Kingdom’s future was at stake, the Swiss referendum to reinstate the Swiss franc as a sound currency will have far-reaching implications not only for the gold market but also the global financial system as a whole.
Fortunately for the UK, the Scots caved in at the last minute, voting to keep Scotland within the union. Otherwise, the UK as we know it would have fallen apart. But the outcome of the November 30 Swiss referendum on gold remains uncertain with just a month to go.
Luzi Stamm, an MP from the Swiss People’s Party, has garnered the 100,000 signatures required to launch a national referendum on a proposal to return soundness to the Swiss franc through securing adequate gold reserves for the central bank. The motions of the gold initiative are threefold:
The gold of the Swiss National Bank must be stored physically in Switzerland.
2. The Swiss National Bank does not have the right to sell its gold reserves.
3. The Swiss National Bank must hold at least 20 per cent of its total assets in gold.
So, what’s the big deal then?
Well, in 2000, the Swiss National Bank (SNB) held about 2,600 tonnes of gold in its reserves. This represented about 8 per cent of total global central bank gold reserves. It is no surprise that the Swiss franc was then one of the most stable currencies in the world.
Many countries held the Swiss franc in their reserves due to the strong backing from the Swiss central bank’s huge gold hoard.
But the situation gradually changed. In 1992, Switzerland joined the International Monetary Fund, whose job is to promote the fiat currency system under which the US dollar serves as the world’s reserve currency.
Under the IMF, gold has been sidelined from the components of its members’ monetary policy. In 1996, the Swiss federal government started a legislative process to amend the monetary policy clause in the constitution.
This would effectively de-link the Swiss franc from gold. It came into effect in 2000, after which the Swiss National Bank immediately joined the Washington Agreement on Gold Sales.
All of these developments have given Swiss officials the green light to unload gold from its reserves under the pretext that in the era of fiat money, the precious metal no longer serves much purpose as a central bank reserve. Paper money is good enough.
As a result, since 1993 the SNB has been the biggest seller of gold, shedding almost 1,600 tonnes. The average price was $300-$500 per ounce.
In 1999 gold made up 43 per cent of the Swiss National Bank’s reserves. This figure has fallen dramatically, to 18 per cent in 2009 and 7.6 per cent today. With gold flying out of the door, the SNB has gone to work on its printing press.
Since 2009, the bank has expanded its balance sheet fivefold. It’s common knowledge that increasing the money supply creates inflation and erodes the value of the currency involved.
In response, the Swiss Gold Initiative seeks to end this monetary policy abuse of central bankers and the encroachment of politicians in the formulation of monetary policy. If the Swiss vote no in the referendum, then business will go on as usual.
But they vote yes, it will trigger an avalanche in the gold market. That’s because in order to keep 20 per cent of gold in its reserves, it the Swiss National Bank will have to purchase 1,700 tonnes of the precious metal.
This would amount to about 70 per cent of the world’s total annual gold production. The price of gold would rise significantly in anticipation of the demand from Switzerland.
Other countries might then follow suit by shifting their money policy from the fiat-based to the gold-based system. Paper currencies without any asset backing will be at risk of losing trust.
Egon von Greyerz, a respected Swiss gold fund manager and a campaigner for a “yes” vote in the referendum, said:
“Let’s first say that the government is against it. So, they are in the ‘No’ camp and so is the Swiss National Bank. They are not supposed to campaign officially in these kinds of referendums, but they still are making clear statements that it is dangerous for the Swiss National Bank to lose its powers to … manipulate the market. So, the ‘No’ camp are afraid they will lose the power to print money, and manipulation of markets is going to be taken away from the Swiss National Bank.”
Greyerz added, “It’s too early to call it, but I would say we stand a very good chance. I am firmly in the ‘Yes’ camp, and I am a great believer in this fight for sound money.”
The Nation 2014-10-31