The Swiss will vote on a referendum on November 30th that would ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign stored gold holdings to Switzerland, and mandate that gold must comprise a minimum of 20% of central bank assets.
The SNB does not usually comment on political referendums. However, in this case it has done so quite vocally.
© UnknownA “YES” vote will begin a process to restore restraint, accountability, and transparency on an institution that took advantage of the removal of its previous gold holding constraint already once before to explode its balance sheet, reinvent itself as a hedge fund, and significantly expand into areas of policy far beyond its original remit.
Why has the central bank decided to step into the political fray and oppose this initiative? What are its concerns? Are they valid or motivated by other factors?
The SNB's primary objections to the gold initiative are three fold.
- It claims that gold is "one of the most volatile and riskiest investments",
- that a 20% gold requirement will lower the "distributions to the confederation and the cantons" since gold does not pay interest like bonds and dividend paying stocks, and
- that the 20% gold holding requirement will interfere with its ability to conduct monetary policy and complicate efforts to maintain "the minimum exchange rate", the "temporary" policy of pegging the Swiss franc (CHF) to the Euro (EUR) it initiated in 2011 and continues to enforce to this day.
The first two concerns can quickly be addressed and discounted. Gold is indeed a volatile asset at times but so are bonds and equities. In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile than gold. The SMI, the Swiss stock index, lost over 50% of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.50% over the same period.
Regarding the second concern, the distribution of proceeds derived from financial speculation and paid to the confederation and cantons,
one has to question whether or not it is really appropriate for the SNB to re-brand itself as a hedge fund instead of remaining focused on its core responsibilities as a central bank.
Comment: Certainly some interesting observations.