Will The Gold Initiative save the reputation of the Swiss Financial System?

So why is this referendum so important? Because Switzerland has, for hundreds of years, been a bastion of sound monetary policy and low inflation. But this has gradually changed especially since the Swiss government quietly removed the 40% gold backing from the revised Federal Constitution which was adopted by popular vote in 1999. And the FBI enquiry into the tax evasion of UBS clients in 2008 certainly did not do the Swiss financial system any favours. (…)

So why is this referendum so important? Because Switzerland has, for hundreds of years, been a bastion of sound monetary policy and low inflation. But this has gradually changed especially since the Swiss government quietly removed the 40% gold backing from the revised Federal Constitution which was adopted by popular vote in 1999. And the FBI enquiry into the tax evasion of UBS clients in 2008 certainly did not do the Swiss financial system any favours.

No paper currency has ever survived throughout history in its original form. And the Swiss Franc from having been a strong currency is now in the process of being slowly destroyed by the recent policies of the Swiss National Bank (SNB). Since 2008 the SNB’s balance sheet has expanded 5 times from CHF 100 billion to CHF 500 billion. So Switzerland has printed around CHF 400 billion in the last 6 years in order to hold its currency down against the Euro and other currencies. CHF 400 billion is around 2/3 of GDP. This means that Switzerland has printed more money, relatively, than any major country in the world in the last 6 years.

Why this change of policy?

For a very long time, the Swiss Franc appreciated against most currencies and Switzerland prospered with a strong economy, strong currency and lower inflation than most major countries. It is of course a fallacy to believe that a weak currency benefits a country when Switzerland has proved that the opposite is the case. Between 1970 and 2008 the Swiss Franc appreciated by 330% to the dollar and 57% to the DM/Euro. So for almost 40 years a very strong Swiss currency went hand in hand with a strong economy. In spite of this proven success, the new guard in the SNB decided to abandon proven successful policies and print money like most other countries.

To tie the Swiss Franc to a weak currency like the Euro and a very weak economic area like the Eurozone is a recipe for disaster. To align your country to a failed political and economic experiment can only lead to failure.

Swiss Banks – Highly leveraged

But it is not only the SNB that is now following unsound policies but so are the big Swiss banks. From an equity ratio of 15-20% 100 years ago, the big Swiss banks are now down to 2-3.5% (note: because the basis of calculation changed after 2007 it is difficult to make an exact comparison). This means that the big Swiss banks have a leverage ratio of 30-50. Thus a loss in their loan book of 2-3% would be enough to wipe out the entire bank. It is virtually certain that when interest rates go up, the Swiss banks will have losses on the balance sheet or on derivatives that are considerably higher than 2-3%.

The SNB and the Swiss banks are already too big to save in relation to the size of the Swiss economy. Continued expansion of the balance sheets of the SNB and the Swiss banks is likely to lead to a very vulnerable positon for the Swiss economy and currency. With another crisis like in 2007-9, the SNB would have to print unlimited amounts of money which would destroy the value of the Swiss Franc, leading to high inflation or even hyperinflation. With both the SNB and the Swiss banks on a dangerous path, Switzerland now has the unique opportunity to return to a sound financial system that has been its trademark for centuries.

Swiss Gold Referendum – Unique opportunity

A „JA“ vote victory for the Gold Initiative would prevent Switzerland’s economy and currency to reach the same destiny as all paper currencies in their race to the bottom. Already in 1729 Voltaire said: „Paper currencies eventually return to their intrinsic value – ZERO.“

To avoid this fate, Switzerland now has the opportunity to be the first country in the world with official partial gold backing of its currency although with only 20% gold Switzerland is still well behind most major nations. A currency backed by gold means the government and the central bank cannot manipulate the currency at will and print worthless pieces of paper that they call money. This would stabilise the real value or purchasing power of the Swiss Franc. A currency with stable purchasing power leads to stable prices and promotes savings and investment rather than spending and credit. Officially Switzerland, like most countries, has a low inflation rate but for the average person, consumer prices in the shops for food and other necessities continue to rise.

Even though the official Swiss inflation is low, there is massive inflation in some sectors like housing and financial assets. The money printing in Switzerland combined with artificially low interest rates have led to a major housing bubble. Swiss housing prices are now unaffordable for most Swiss and in relation to income prices are now in an unsustainable bubble. An increase of Swiss mortgage rates from current 1-2% per annum to a more normal 4% could lead to major mortgage defaults and a housing collapse.

The Swiss have a history in putting some of their savings into the Vreneli, the Swiss 20 franc gold coin. In recent times, as spending on credit rather than savings has been the norm, the Swiss have bought less gold but in spite of that they have more affinity with gold than most Western nations. The Swiss gold industry is also very significant since the Swiss refiners produce nearly 70% of the world’s gold bars.

The most proliferate savers in gold are of course the Indians mainly by buying jewellery. But in the last few years, China has been the biggest buyer of gold. There is a constant flow of gold going from the West to the East. This has created a shortage of gold in the West.

Swiss Gold sales at bottom of market

Switzerland used to have 2’600 tons of gold but sold over half of it between 2000 and 2005 close to the bottom of the market, just like the UK did. That has cost the Swiss People CHF 27,5 billion at the current gold price. As the graph shows, Switzerland sold over three times more gold than the second biggest seller in the last 20 years.

A YES vote in the Swiss Gold Initiative referendum, would mean that Switzerland would have to buy 1’700 tons of gold at current prices which is $70 billion (CHF 67 billion). This is 70% of annual world gold production. The paper gold market is around 100 times bigger than the physical market. The SNB has 5 years to acquire the 1’700 tons. If they wait to buy, they are likely to get less than 1’700 tons for their CHF 67 billion. The best option for the SNB would of course be to use their Euro and other assets to buy the gold. That would achieve two objectives: It would reduce the size of the inflated SNB balance sheet and it would reduce the amount of money spent on gold. Another benefit would probably be that the Swiss Franc would not be tied to the Euro, a currency that is unlikely to survive in any case. Also, it is a fallacy to believe that the 1,20 peg can be held in the long run. Eventually this artificial currency peg will be attacked by the market and the SNB would spend further CHF 100s of billions until they gave up. This would result in unacceptable losses for the SNB and the Swiss people.

In addition the Initiative requires that Switzerland brings back 300 tons of gold that is currently in the UK and Canada. If this gold is unencumbered, it should come back immediately. But Germany recently had a different experience. They requested to have 674 tons back from the Fed in the US but all they have received so far is 5 tons. One may wonder of course whether that gold is still there. The Fed has either sold it or lent it out. A major part of the gold that has been leased out by Central Banks has been bought by China. China is too clever to leave it in the West and has taken delivery. It is likely that most central banks in the West that have lent or leased gold to the market will have problems getting it back. That is why it is critical for Switzerland to keep its gold at home.

A „Yes“ vote – Beneficial for Swiss economy and Franc

Bringing the Swiss gold back home and partially backing the Swiss Franc with gold will be extremely beneficial for the long term prosperity of the Swiss economy and the Swiss Franc. It will also make Switzerland respected by people worldwide for introducing sound money. It is also likely to set a trend for other countries to follow Switzerland’s example. Therefore a YES vote on November 30 will not only be beneficial to Switzerland but also to the world economy, if the Swiss decision leads to other countries following. It is also likely to have an immediate effect on the depressed and manipulated gold price. The holders of paper gold will be concerned and demand delivery of the physical gold against their paper claim. Since there is nowhere near enough physical gold to cover all the paper claims we are likely to see a major surge in the price of gold.

Thus, Switzerland now has the unique opportunity to create history and to lead the world back to a sound money policy.



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  1. yupp… all those self declared „experts“ do have, of course, absolutely no self interest in this referendum…?! transparency would be more helpful, e.i. to disclose how much he and other „experts“ hedge fund managers and gold traders have funded the campaign from abroad. All the same people can be found of the pro-sites of the initiative! Dont let yourself fool by this gold-voodooists. As a matter of fact Gold in Swiss Francs is Long term, in real Terms, hardly in positive territory as the usd has devaluated 85% to the chf in the past 50 years! Real estate and equities have returned thousands of percentage points in the same period!

  2. Dear Mr. Von Greyerz,

    I do really appreciate your intellectual honesty in the acquisition, analysis, and transmission of ideas.

    From a purely technical point of view, our financial system failed long ago. The prolongation of it, in which we currently find ourselves, has been made possible through the attrition of constitutional government and the rule of law. And the longer things go on in this way, the more the illegalities and repressive measures will be escalated – indeed, they will also grow exponentially. Any further continuation of this structure within this financial systems leads inevitably and automatically into a phase of fascism, which can be defined as the oppression of the people by a combination of banks, corporations, mass media, and politicians. The „Gold“ and power of money must be exclusively in the hands of the people, and must therefore belong to the entire nation, which cannot be confused with the government.

    The German Bundesbank can be used as a model for this, even if, because of the reserve
    currency status of the dollar, it is unable to act with real freedom. It would also be wrong to assert that the government is fundamentally unable to manage money. It is more accurate to say that the political actors who are installed in power under current conditions do not understand the money system, even as they force the government into excessive indebtedness.

    A public central bank managed in the public interest must defend the interests of the national population, and no longer follow the interests of a privileged private banking

    A public central bank possessing a monopoly on the creation of money would transform the
    institutional framework so completely that many economists and bankers of today cannot
    understand our concept. They have been thinking within the limits of the dominant system for too long. Most bankers do not even know that their corporations can use as little as CHF 2,500 in a savings account as the basis for issuing CHF 100,000 in credit. The interest on the money thus created in the form of debt flows to the creditors and has to be made up through the labor of the debtors. With circulating money, for example by contrast, these interest payments are avoided, which frees up so much capital for the population that, in addition to paying for the guaranteed minimum income it will even be possible to abolish all taxes.

    Best regards
    Der Praktiker

  3. Gold might be a sound investment in these turbulent times. But forcing the SNB to increase its reserves in the way the initiative does, would not be useful.

    It’s incredible how some people want to „change history“ with risky reforms (the other being the pending 100%-money reform, same goal, opposite way). These reforms cannot work in a small open economy. The most they can do is destroy the monetary system in Switzerland – but not elsewhere. The Swiss franc might become very unstable if it really becomes tied to Gold, and Inflation will get out of control.

    Think again, the goal is ok, the instrument is more than questionable.

    • @Philipp dr Plex

      Not this gold initiative is the great danger for the Swiss economy but the huge currency position of the Swiss National Bank

      Kind regards

      Marc Meyer

  4. @DavyCrockett
    I am not trying to be smart; just trying to understand.

    Why do you – like many others – say that a „Yes“ vote would provoke a collapse of the peg? If the SNB buys gold with its dollars, it’s no different from someone else’s buying gold with dollars. It should have no bearing on the CHF exchange rate.

    The SNB could still continue to buy foreign currencies to hold the CHF at 1,20. It would simply have to print more CHF so it can buy both, the foreign currencies and the additional gold required.

    If the SNB decides to do „whatever it takes“, regardless, it might end up with a balance sheet total of 10 trillion CHF including 2 trillion CHF in gold (if there is so much gold in the market) but it can keep buying foreign currencies and gold as long as it can print the CHF without destroying its value totally.

    • The SNB has been buying loads of EUR with its CHF over the past three years to maintain the peg. This policy also succeeded in keeping the CHF speculators away, because (if the peg holds) their potential gains are limited. But the Euro is itself a fragile currency, and could collapse at any moment. So if the SNB starts to sell Euros to buy gold, it could not only push the Euro down (below the peg), but start a speculative wave of selling Euros and buying CHF (which the SNB could not hope to stop). This would of course also wipe off hundreds of millions (or more) off the value of the SNB balance sheet, since so much is in Euros. You may ask why the SNB would sell Euros rather than dollars or CHF to buy gold. Well it could, but then they get in even deeper hot water in the long term. Their balance sheet would be way overweight in Euros (a fragile currency likely to devalue) and printing unlimited CHF would long-term threaten the savings of the Swiss people (and may even be illegal, I don’t know.) The SNB has certainly helped Swiss exporters, but the it is likely to pay a high price (whatever the result of the referendum.)

    • @Klaus Kastner

      „Printing money“ means that the Swiss National Bank is getting a credit from the commercial banks.

      Commercial banks, however, cannot supply the SNB with loans endlessly, especially not in the amount of 10 trillions; and especially not in case the equity of the SNB should turn negative.

      As the SNB cannot „print money endlessly“ the SNB cannot buy Euros endlessly. As a conclusion, the SNB will not be able to fix the Euro at 1.20 forever.

      This is, in my eyes, an illusion.

      I think it is high time for the SNB, to quit it’s currency adventure now.

      The Gold Initiative gives a good opportunity, to do so wihtout anybody losing his face.

      Kind regards

      Marc Meyer

      P.S. to print money is no difficulty. However, it will be impossible for the SNB to book „printed money out of nothing“ in its balance sheet.

  5. There may well be some individuals in the SNB (and elsewhere) secretly hoping for a „Yes“ vote. If it provokes a collapse in the peg, and exposes the billions lost as a result of the accumulation of Euros in the balance sheet, they will be able to blame the voters. Otherwise, when the inevitable finally happens, they will take the blame themselves.

    • @DavyCrocket

      „When the inevitable finally happens…“

      Well expressed

      Sadly but true

      Kind regards

      Marc Meyer

    • Just the facts please! The Euro is the strongest world currencies still. +19% to the usd, +15% to the jpy and +18% to the gbp since ist introduction. the fundamentals are much better than elsewhere. positive trade- and current account balances, lower total debt.the USA has a huge trade and current account deficit since decades and more than 120% debt gdp! Japans government debt lies around 280% gdp! yes the main aim of the Initiators of this gold-Voodoo initiative is to force the snb to quit the peg to the euro, because THEY, absolute laymen, believe the euro is worth nothing… Gold in CHF Terms is in negative territory in real Terms over 50 years. The guys behind the initiative are all members of the nationalistic AUNS who would prefer, if the people would let them, build a wall around Switzerland and go back 150 years and grow patatos, corn and produce milk and cheese… If laymen actually beleive that they are better qualified than the guys at the SNB to run our mentary policy we have reached another point of lunacy of our political System. If politics and political Agitators start to mingle into the independance of the SNB the that is the beginning of the end of our stability!!

  6. I think I understand, and I appreciate, the motives behind the Gold-Initiative, as they are also described in the article. However, I fail to see how the Gold-Initiative will accomplish that. Frankly, the only way I can see how these motives can be accomplished would be to return the CHF to the gold standard. If one doesn’t want a gold standard but one still wants to limit the SNB in its actions (rather: in its speculations), one would have to limit the size of its balance sheet (i. e. as percentage of GDP). The size of the Fed’s balance sheet, even after all the gigantic QE, is below 30% of GDP. The ECB’s balance sheet is probably even lower. And Switzerland, with over 80%, smacks of a world record holder.

    If the SNB buys the gold with its FX reserves, not much becomes really different. One foreign curreny asset is converted into another one. One asset subject to high value fluctuations (and book profits/losses for the SNB) is converted into another one of the same type. One difference is that a paper asset is coverted into a tangible asset. Another difference is that an interest-earning asset is converted into a non-interest-earning asset.

    I am not familiar with the gold market but my gut tells me that if a market participant accounces that he has to buy up 70% of an annual production (albeit over 5 years), that could have something to do with the price of gold. And the higher the price of gold, the greater the potential for price declines and valuation losses for the SNB. Do the Swiss voters understand that risk?

    I agree that the SNB’s CHF-policy carries very significant risk. After all, they have incurred a long position against the CHF of about 450 billion CHF. Regardless whether a long position brings profits or losses, a long position (or any position) always carries risk. But isn’t that Switzerland’s fate in a way? The fate of a country which is so successful that the people and monies of other countries want to get there? One should ponder the fact that, overall, Switzerland has gross foreign currency assets of about 3,6 trillion CHF, or about 6-times its GDP. Whenever the value of foreign currency assets declines (be that through devaluation, assets losses or whatever), the national wealth of Switzerland declines (unless those foreign currecies assets are directly backed by foreign currency liabilities). In a way, the SNB’s long position is only symptomatic for the much larger long position of the entire country.

    I, too, think that a strong currency can very well go hand-in-hand with a strong economy. That also was the case in Germany before the Euro. There should be one concern, though. The Swiss economy is relatively small. Cross-border capital flows have a much greater impact on the Swiss economy than they would have had on the German economy during DM-times. There could come a point where the strength of the CHF is less due to the strength of the economy but more so due to the desire of investors to put all their monies into CHF. At that point, Switzerland could rather quickly run out of options.

    • Sorry for my English. As you might know the gold price is going down while the annual production dosn’t meet the annual needs in gold. Why is that so? Simply beaucause of the ETF paper which total amount has reached a multiple of the physic gold stocks in the world… At the end the question is: would you prefer to hold paper (EURO) or gold? Remember that USD was convertible in gold in order to convince people to accept paper money. When the US abandon this they arguent the économic force is the value of the money. But people dont beliefe anymore in that theory, thats why prefer to buy real estate instead of keeping their monney on a account. So why souldn’t the BNS converte somme of their 170’000’000’000 Euros in Gold?