The next big market shock can come from 'Save Swiss gold' movement

On November 30, 2014, Switzerland will have a referendum to legislate its central bank to have at least 20% of its assets in gold, which could have a far-reaching impact on the precious metal

Love for gold was supposed to be an Indian affair but that was before the Chinese came in and overtook Indian annual purchases. Even this will now change from November 30, 2014 if the Swiss have their way. November 30, 2014 can be a game changing one for the gold market globally. The Alpine country will vote on that day on the so-called “Save our Swiss Gold” initiative.
 
The motion calls for the central bank to hold at least 20 per cent of its assets in gold, prohibit selling any gold in future and bring back all its reserve of gold back in the country.

 
The government of Switzerland and its central bank (SNB), however, are not keen on this citizen movement and are stepping up efforts to block the motion that would force the country to almost triple the amount of its gold reserves.
 

Started by three Swiss People’s Party politicians – parliamentarians Luzi Stamm, Lukas Reimann and Ulrich Schlüer – the initiative to “Save Switzerland’s gold” was handed in to the Federal Chancellery in 2013. The upcoming referendum, a regular occurrence under Switzerland’s system of self-government that requires 100,000 signatures to get on the ballot, was organized by members of the centre-right Swiss People’s Party (SVP). Till date the country has had 66 such referendums on various issues including the most popular and controversial one on anti-immigration.

 
SNB is currently sitting on assets worth around half a trillion dollars. According to a UBS analyst if the referendum is approved the country would end up purchasing 1,500 tonne of the precious metal to comply with the citizen demand.
 
To get an idea of the size of the purchase, the amount to be purchased is roughly 50 per cent of the world’s annual production of gold. According to a Saxo Bank analyst: “That kind of gold buying would put what we’ve seen recently in China to shame.” China purchased 1,176.4 tonne of gold in 2013 according to the China Gold Association. The impact will be cushioned to some extent as Switzerland will have time to reach the 20 per cent limit in five years. However, every year after that it will have to add to its reserve by buying more gold.

 
But why the sudden love for gold, one may ask. Switzerland is one of the richest and most conservative country in Europe has a long history of love with gold, though not as long as Indians have. Switzerland was among the last nations to abandon gold backing for its currency, the Swiss franc.
 
Till 1999 Switzerland’s constitution required the national currency to be backed by gold at 40 per cent. However, legal changes introduced between 1997 and 1999 by the Swiss government and the central bank resulted in the country selling its gold down to 7.5 per cent of its asset.

 
Between 1999 and 2003 the country sold 50 per cent of its gold reserves, most of it near rock-bottom price of $200 an ounce. It had Bank of England as its co-seller of gold at those levels, when Gordon Brown as the UK Chancellor of the Exchequer decided to sell gold at prices which have never been seen since. The level of $200 per ounce in global gold market circles has since been known as ‘Brown’s Bottom’. 
 
To add to the problem of both the UK and Switzerland, the proceed of sale of gold were invested in buying currencies, especially euros as both the countries were not part of the Eurozone and needed to hoard up euro reserves to peg their currency with their neighbours. Unfortunately, gold prices since then have moved up six times while the euro has not done much during this period. In fact the Swiss franc is now pegged at 1.2 euro in order to enable the country to remain competitive which means Switzerland has to buy the weaker currency and devalue itself. Since 2010, SNB’s foreign currency holdings have gone up 130 per cent to 470 billion Swiss franc equivalent in August.

 
The conservative right wing party of Switzerland is questioning this treasury management skill of the government. Buying currencies of weaker countries in order to remain competitive is a short term measure according to party officials.
 
Also, the demand for bringing back its gold in foreign country stems from an event that took place between their neighbour Germany and the US. On January 16, 2013, Germany asked for a portion of the gold (300 tonne) it had deposited with US Federal Reserve to be returned. A year later Germany received only 5 tonne of gold as compared to the 3,396 tonne of gold (45 per cent of its reserves) deposited with the US. This created a sort of crisis in the global markets but was resolved by Germans backing down on their demand and giving the US a longer rope.

 
A trust deficit was, however, created which is why Switzerland’s right wing party wants the gold back. Currently, the bank has 1,040 tonne of gold, with roughly 70 per cent stored in Switzerland, 20 per cent at the Bank of England and 10 per cent at the Canadian central bank.
 
Gold bugs across the globe are watching the November 30 deadline as fresh round of physical gold buying can be expected. But more than that, the financial world is waiting with baited breath as one of the richest and most conservative countries decides to peg its currency back to gold standard.