Save Our Gold : A few thoughts on the Swiss Gold initiative

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1 Background In an attempt to halt the slide into an ever depreciating fiat currency, there has been a movement in Switzerland to return the Swiss franc to a hard asset backed currency, a currency backed by gold. Due to the intricacies of the Swiss constitution, merely getting people to sign a petition can bring about a national referendum. Having secured the minimum requirement of just 100,000 signatures (yes, democracy can work ), a minority political party in Switzerland, the Swiss People s Party, has been able to trigger the vote. Subsequently, on 30th November, Switzerland will hold a referendum in a vote that has been dubbed the Save Our Gold initiative. If the referendum is successful then it would require the Swiss National Bank (SNB) to: Hold at least 20% of its assets in gold Repatriate any gold reserves that are held in abroad (currently around 70% of Swiss gold is held at the SNB, with around 20% in the UK and around 10% in Canada). Never sell any of its gold reserves 70% of Swiss gold is held at the SNB N.B. T o comply with this, the SNB would have 2 years to repatriate any gold reserves held abroad and 5 years to build up its gold assets to meet the 20% requirement. The referendum is just step 1 of a 2 step process However, achieving a majority Yes vote is just the first step of getting the initiative passed into the constitution. If a majority of 50% of the vote is secured by the Yes campaign then the process moves to the next stage. The decision is then put to the 26 cantons in Switzerland which also then vote on the initiative. There needs to also be a majority secured in the cantons for the country s constitution to be amended. Only then would the SNB be required to act on the initiative.

2 SNB balance sheet developments In 1999, the SNB held around 2,600 tonnes of gold (which at the time accounted for c. 8% of total gold reserves held in global central banks). With gold trading around $300 per ounce, data from the World Gold Council suggested that the SNB s gold was around 40% of its Swiss foreign exchange reserves. However, over the next decade the SNB literally sold tonnes of the precious metal. By 2008 the SNB sold around 1500 tonnes of gold. This has left only around 1040 tonnes of gold on the balance sheet today. Furthermore, after the Global Financial Crisis of 2008, the SNB decided that it would act to prevent the Swiss franc from appreciating too much against the euro. It subsequently introduced a floor of under which it would not allow Euro/Swiss to breach. Since then, the SNB has been buying vast sums of euro denominated assets, much of which has been Eurozone sovereign debt. The table below shows the changes to the balance sheet since Year GOLD % of total NAV Foreign Exchange Reserves Euro reserves US dollar reserves % of total NAV % of total NAV Total Net Asset Value of the Balance Sheet bn 18.4% 55.0bn 26.5% 28.5bn 13.7% 207.3bn 2014 Q3 38.9bn 7.5% 210.3bn 40.3% 136.1bn 26.1% 522.0bn N.B. denotes Swiss Francs; NAV denotes the Net Asset Value of the balance sheet Observations: Since 2009, the balance sheet has more than doubled in size as the SNB has significantly increased its foreign exchange reserves (which now stand at 471.5bn and 90% of the total size of the balance sheet of 522.0bn). Foreign exchange assets denominated in euros now account for around 40% of the balance sheet, with US dollar assets around 26%. The amount of gold owned by the SNB has barely changed for the past 5 years. The actions of the SNB in the past few years have meant that gold now only accounts for just 7.5% of the total assets on the balance sheet.

3 How much gold could the SNB need to buy? The SNB currently holds around 39 billion Swiss francs () of gold on its balance sheet out of a total balance sheet size of 522bn. Therefore, gold accounts for around 7.5% of the total assets on the balance sheet. Clearly in the event of a Yes vote, the SNB would need to buy a significant amount of gold to meet the stipulated minimum requirement of 20%. On the assumption (clearly theoretical) that the total asset value on the balance sheet did not change, then the SNB would need to buy an extra 104bn of gold to increase the holding of gold to 20% of the assets. At the exchange rate of on Dollar/Swiss this means that almost $68bn of gold will need to be bought. $68 billion of gold This would suggest that if the Save Our Gold referendum was successful then the SNB would need to buy a significant amount of gold to meet the requirements of the referendum. At a gold price of c. $1185 per ounce, this means that the SNB would need to buy around 1600 tonnes of gold. 7.5% 20% NB. This assumes the balance sheet does not change in value, whilst the SNB would also have 5 years to be able to complete the transition. Total balance sheet size = 522bn

4 The impact of a ratified Yes vote So, if Switzerland votes Yes in the referendum and if the 26 cantons return a majority positive vote, what would be the impact on financial markets? GOLD FOREX OTHER ISSUES Well, the impact on the price of gold could range from anything from a fairly significant move to an utterly ground breaking move. The SNB would have to buy around 320 tonnes of gold per year. In 2013 the total global gold production for the year was 2,770. Therefore the SNB would need to buy around 11% to 12% of annual global gold production for the next 5 years. This would mean that the market would know that there would consistently be a buyer in size sitting in the market for years to come. Some estimates have suggested that gold could increase in price by as much as 20%. However, the Swiss Gold Initiative could be the building blocks behind the next bull market in gold which the gold bugs can really get behind. If that is the case, who knows where it might end up? Likely impact: Gold moving sharply higher In order to keep a lid on the value of the Swiss franc at over the past few years, the SNB has bought significant amount of euro denominated assets, much of which has been Eurozone sovereign debt. In order to purchase the amount of gold required it is highly likely that the SNB would sell vast swathes of its euro denominated assets to pay for the gold. This could put significant pressure on not only Eurozone debt, but also on the value of the euro itself. This would also result in the SNB abandoning the floor of against the euro. Without the SNB there to hold back the value of the Swiss franc by purchasing euro denominated assets it is likely to result in the market making a significant bet on the Swiss franc. Likely impact: Euro losing value, Swiss franc sharply higher, meaning EUR/ dropping sharply below If the referendum goes through it marks a considerable move away from the fiat currency route of ever depreciating the value of a country s currency. Due to the fact that the SNB would NEVER be allowed to sell any of its gold holdings, it would mean that Switzerland would in effect be back on the path towards a Gold Standard of a proper hard asset backed currency (i.e. the opposite of a fiat currency). Would this then start a trend of other countries doing a similar thing? Additionally, with the need for the SNB to repatriate 30% (around 300 tonnes) of its gold back to Switzerland this may have a big impact on gold ETFs. With reduced supply in the market, this could also be a reason to drive the price higher.

5 What are the chances of it going through? An opinion poll from Swiss broadcaster SRG at the end of October put the Yes vote on 44%, No on 39%, with 17% undecided. However, in the latest poll that SRG has conducted, the support for Yes has since dropped significantly to 38%, whilst the No vote has gained in strength to 47%, with 15% still undecided. YES Latest poll by SRG??? This would suggest that support for the referendum is waning and that a Yes victory is becoming unlikely. However, in this time of widespread protest against the European political elite, nothing should be ruled out at this stage. No Conclusion The result of the referendum is still difficult to call with any certainty. The latest opinion polls suggest that it is becoming unlikely that the Swiss Gold Initiative referendum will be successful. In 20 minutes following the announcement of the latest poll on 19th November, the snap reaction was for the gold price to drop $20, but this move was subsequently entirely retraced. However, if the referendum to Save Our Gold does pass with a successful yes vote, it seems highly likely the gold price will rise. In recent days there seems to have been a shift in sentiment for gold. After months of trading lower with a clear negative correlation to the US dollar, the gold price has been finding support on days where there has been dollar strength. So, it would appear that in the run up to the referendum, gold is managing to find support, regardless of the recent opinion polls. That might suggest that the result of the vote could produce wild swings in gold, regardless who wins. traders DIARY Monday 1st December The big winner on Monday 1st December is likely to be volatility. This is something that any gold traders should be aware of.

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