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« Capitulation or Nasty Sell-off in Gold? | Main | What caused the ‘Vomiting Camel’ pattern in gold »
Wednesday
Nov052014

The Swiss Gold Initiative and why it may affect gold prices

Background

The people of Switzerland go to the polls on 30th November to vote on the gold initiative. The proposal requires the Swiss National Bank to hold gold reserves of at least 20% of the value of the assets of the Swiss National Bank. The initiative also wants no further gold sales by the SNB and all Swiss Gold to be stored in Switzerland.

If the yes vote is successful then they would be required to buy 1500 tons of gold over a period of five years, in order to achieve the 20% target. This acquisition would then be held indefinitely as they would not be allowed to sell it. However, in the case of a yes vote, the referendum would still have to run the gauntlet in the Swiss parliament in order to gain ratification.

Latest News on Poling

As far as we can gather the polls have been mixed with some reporting that 38% of voters would support the Swiss gold initiative and 47% would be against it and others showing 45% in support and 38% against this initiative.

A yes vote would also have ramifications for the current peg between the EUR/CHF, it’s hard to see just how this could be maintained with a currency backed by so much gold. A re-priced Swiss Franc at a much higher value increases the buying power of the people, but makes exporting goods and services that bit more difficult. Should the bank decide to stick with its current monetary policy and maintain the floor that is there at the moment then for every euro that it buys a purchase of gold will be required in order to maintain its gold ratio at 20% of its holdings.

Both houses of Parliament are already urging voters to reject the motion as it is something they don’t want as it limits their powers regarding future policy. These referendums, as we understand it, have to be approved by a majority of the Swiss Cantons or member states, of which there are 26 of them and they are apparently not in favour of this change.

Chart of gold’s recent performance


The triple bottom has failed to hold despite the upcoming Swiss Gold Initiative, but there are still a few weeks to go and a week can be a long time in the precious metals arena.

Conclusion

The Swiss Federal Council and both houses of Parliament have already recommended voters to reject the motion and even in case of a yes vote, the proposal would have to be approved by a majority of Swiss Cantons and they have already indicated that they are against the motion.

Should it all go through then the amount of gold purchases that they have to make would effectively put a floor under the price, especially as the buyer doesn’t have a choice but to buy.

No doubt traders will be analyzing this situation and positioning themselves according in order to benefit from the outcome.

Our very humble opinion is that it is too early to tell which way this vote will go and even if the Yes camp win we don’t know what other powers may be invoked by the central planners in order to retain the status quo. The only certainty is that they won’t give up without a decent fight which could years to resolve.

Either way we expect more volatility in both directions in the precious metals market with the oscillations becoming more extreme in this tug of war over the power to govern.

This initiative is an important part of gold’s fortunes, but we would suggest that monetary policy, and the US dollar are more important and for that reason we will continue to short the weaker stocks, buy puts and retain the lion’s share of our funds in cash until gold completes its final capitulation process.

Got a comment, fire it in, especially if you disagree, the more opinions that we have, the more we share, the more enlightened we become and hopefully the more profitable our trades will be.

 

Go gently.

 

The question is; is this the real deal or another head fake? Is the bottom really in? Is this the final capitulation that we have been waiting for? 

If you would like to know which stocks we are buying and/or shorting please join us atStock Trader our premium investment service.

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Reader Comments (2)

Hi Bob – For what it’s worth I think the Swiss initiative is not going to pass based on the premise that such action would strengthen the Franc.

1. Swiss exports are a major component of their economy. As a percentage, exports are 52% of the country’s GDP. This compare to Germany at 51%, Canada at 30%, New Zealand at 30%, UK at 31% and the US at 14%. Open this link for the complete table. If the data was for the Eurozone only, this percentage would undoubtedly be much higher.

http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS

Naturally a stronger Franc would harm exports and create job losses.

2. The Swiss rely on tourism and business travel for their hospitality industry. A stronger currency also harms this sector and create job losses.

3. In the summer of 2011, the Swiss shockingly (to me at least) linked the Franc to the Euro at 1:20 to 1:00. See chart in this link. http://stockcharts.com/h-sc/ui?s=$XSF&p=W&yr=5&mn=0&dy=0&id=p07355158960

This has become policy for the reasons above and I doubt they’ll change this.

4. The Swiss aren’t stupid and undoubtedly learned what happens when you telegraph your intentions to a market. Recall the Washington Accord and Gordon Brown’s folly and how they affected the price of gold in the 1990’s. If indeed the Swiss wanted to beef up their gold reserves they’d somehow follow the Chinese example of stealth.

5. It all boils down to jobs. The voters in the referendum won’t vote “Yes” if they feel that a “Yes” vote would take away their source of income.


Anyway, that’s how I see it on a dark and gloomy morning here on the Wet Coast and I seem to recall I may have been wrong in the past. We’ll see soon enough. The chatter from the Gold Bugs will increase to crescendo levels the closer we get to November 30th. It will be challenging to dampen all that noise coming from that crowd.

Saludos Muchacho!!

Hugh

November 6, 2014 | Unregistered CommenterHugh

Hi!, Mr. Kirtly & Staff:

The bottom line for me in todays’ unsecured currency world is: “We all want a gold standard income within a fiat economic world over which we have lost control except it has turned against everyone, in my humbled opinion!” The Swiss in this regard use to live in agreement with gold didn’t they but have evidently capitulated to fiat standards also regards internationally trading their goods abroad then what a shame to forfeit their currency leadership role we once believed to be rock solid, in order to sell their productions into the depreciating, trade wars fiat system that rules todays’ judgments which are no longer tied to precious metals standards but instead tied to the inflation vs. deflation arrangements we see destroying confidence in fiat currencies worldwide we see operating today.

It now appears that my earlier beliefs that the Swiss could hold the line on their position regarding gold which would eventually bring all other world currencies in alignment with their standards regarding currencies being tied to gold have been lost in todays’ fiat money orgies drawing the Swiss standards down instead.

What a shame for all concerned. It appears now that only Germany sees this destructive trend in light of their experiences with hyperinflation in 1923 but Germany, unlike China who is working fast to tie their currency to gold evidently, has a fiat currency once again also which gives them near no leverage including they capitulated also regards the arrangements to have their foreign held gold repatriated home.

So, at this time it appears that no world government wants gold to backstop their currencies but instead want to continue the depreciation policies inherent in their trade wars? As time values go by we shall see what the governments want and try to position OUR investment portfolios accordingly.

November 7, 2014 | Unregistered CommenterRuss

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