The Swiss Gold Vote: Should Investors Worry?
If it’s a yes, the SNB will need to hold at least 20% of its (pretty huge) assets in the shiny yellow stuff, from around 8% now. It will have five years to get into line.
Will it vote yes?
Probably not. Supporters’ ability to convince the population that gold is a source of stability is challenged by the recent high volatility of the commodity, said Beat Siegenthaler, strategist at UBS.
In any case, if it does vote yes, “it also would need to be passed by a majority of Swiss Cantons. Given that the SNB and the Federal government are actively opposed to the constitutional amendment, the second step may be an insurmountable barrier,” pointed out Barclays.
Even if official polls on this referendum have not been published yet, the Scottish independence vote is still fresh in investors’ minds. Investors were complacent about this for months in the runup, when it looked like an easy win for the ‘no’ camp, but as the vote drew closer, so did the opinion polls. Cue a nasty shakeout in sterling. And, Mr. Siegenthaler noted, in this case, “the market impact of a yes-vote would likely be quite spectacular.”
What about the gold?
The SNB has about 500 billion Swiss francs ($520 billion) in reserves—an amount that whooshed higher from 2011 when it imposed a floor on the euro’s value against the franc. It will not allow the euro to trade under CHF1.20 under any circumstances, and reiterates as often as anyone will listen that it will buy euros in unlimited quantities to stop that happening. Hence, as a share of GDP, Swiss reserves are some of the biggest in the world.
The SNB currently holds 1040 tons of gold, equating to 8% of its reserves, down from about 20% in 2008. To reach the 20% target, “the SNB would have to buy around 10% of global annual production during five years in order comply with the initiative by 2019,” said Mr. Siengenthaler. This would be equal to around 1500 tons of gold in total.
Longer term, “it likely would raise the long-term equilibrium price for gold,” according to Barclays BARC.LN +0.20% strategists, although the bank adds that “spread over five [years, it] is more digestible, given the weakening demand dynamics.”
And what about the franc?
The key is what happens to the CHF1.20 euro floor.
Barclays reckons an obligation to stock up on gold could reduce the SNB’s commitment to that limit. Even if the central bank would not be prohibited from defending the limit or operationally impaired by the gold-share requirement, “defense of the floor would then come at the cost of reduced future policy flexibility,” Barclays said. In other words, if it needs to buy stacks of euros to defend the floor at any point, then it would automatically need to buy gold too, to keep to the 20% ratio. This would not only be costly, but also permanent as the proposal also limits the SNB from selling the gold it buys. Defending a temporary policy, such as defending the currency floor, would then have permanent implications, making it harder to sustain over time.