Despite strong opposition from the Swiss National Bank (SNB) and mainstream politicians, the Save our Swiss Gold campaign launched in 2011 by the right-wing Swiss People’s Party has a realistic chance in a November 30 referendum of forcing the central bank to reverse the sale of 1,550 tonnes of gold since the turn of the century. In turn this would boost the central bank's gold assets to 20% of its balance sheet, from the current 7%. In addition, the referendum proposes a ban on the sale of gold, which should be stored exclusively in Switzerland.
According to the most recent poll, conducted by Swiss tabloid newspaper 20 Minuten, 38% of Swiss voters support the referendum proposals, with 47% against, suggesting a no vote is more likely. However, from an FX market point of view the nine percentage point difference counts as too close for comfort.
“An earlier poll showed that the yes campaign was ahead, so the evidence would suggest support is falling, but from an FX market point of view it’s hard to ignore the risks,” says Anezka Christovova, an analyst at Credit Suisse in London. “Certainly over the recent period we have seen a certain amount of cautiousness in the options market, with euro/Swiss franc implied volatility edging higher.”
Purchases of gold by the SNB would threaten Switzerland’s self-imposed peg against the euro, put in place at 1.20 in September 2011 amid concern the currency was rising too fast on safe-haven flows. If there is a yes vote on November 30, the theory goes that the central bank will raise money to buy gold by selling euro-denominated FX reserves, undermining the peg and encouraging speculative attacks.
One month implied volatility on US dollar/Swiss franc was 9.1% late on Tuesday, compared with 7.1% at the beginning of the week, suggesting investors are increasingly keen to hedge or take risk on the yes vote coming to pass. At the beginning of September, three-month implied volatility, covering the date of the referendum, was 6.2%, according to Crédit Agricole pricing.
“The reason the vote is creating interest in the options market is because of the potential significant impact on the euro peg,” says Adam Myers, European head of FX strategy at Crédit Agricole. “The simplest way to buy gold is to sell the euro and that is exactly what the Swiss central bank does not want to do.”
Such has been the level of central bank concern over the issue that it has taken the unusual step of getting involved in the political debate, arguing that the initiative is misguided.
“The initiators see a high level of gold reserves as a guarantee for currency stability,” policymakers said in a recent statement. “They fear that the Swiss franc will decline in value and that price stability will be threatened if a large proportion of the balance sheet does not consist of gold holdings. However, the measures proposed to this effect are not suitable; in fact, they are even counterproductive. Instead, they are based on misunderstandings… and would compromise the SNB’s capacity to act in pursuing its monetary policy.”
In short, the SNB says, holding a large proportion of its reserves in gold would prevent the central bank from expanding or contracting its balance sheet to ensure price stability.
The statement added: “In a worst-case scenario, the assets side of the SNB’s balance sheet would, over time, be largely comprised of unsellable gold. Managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet; in practice by issuing the SNB’s own interest-bearing debt certificates (SNB bills). This would have serious financial consequences.”
A further problem for the SNB wold be that in nearly trebling its gold holdings it would be likely to push up the gold price. Gold in recent trade was near $1,167 an ounce, the lowest level since 2010, suggesting that for the moment the gold market is not taking the Swiss referendum too seriously.
That might be because the wording of the referendum allows five years for the SNB to increase gold reserves to 20% and two years for gold to physically return to Switzerland.
“The five-year allowance should give markets comfort,” says Myers. “Also the central bank is printing money to buy euros and it could use some of that money to buy dollars and gold – so they do have that weapon if they need to keep the franc in check. However, for the moment there is definite uncertainty, particularly for investors levered to the franc.”