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Arkadiusz Sieron

Arkadiusz Sieron

Writer, Sunshine Profits

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of…

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Sunshine Profits' Take on the Swiss Gold Referendum

We have recently been asked to comment on the upcoming referendum in Switzerland on gold. In particular, we were asked if this could be the turning point for the gold (and other precious metals) market that has been declining for more than 2 years now. The simple law of supply and demand dictates that when the demand for something increases, its price should go up. However, things are rarely simple in the financial markets and it's definitely not simple in case of gold. Will this be the start of a domino effect and escalation of gold price? You'll find our take on this timely matter below.

Actually, we have been expecting to see the above question. The referendum for the Swiss Gold Initiative is scheduled for November 30th and the closer we get to the vote, the greater the interest. What is this all about and what win for the initiative would imply for the gold market?

The motions that make up the Swiss Gold Initiative are threefold:

  1. The Swiss National Bank (SNB) does not have the right to sell its gold reserves
  2. The gold of the SNB must be stored physically in Switzerland
  3. The SNB must hold at least 20% of its total assets in gold

The first point would not change anything, because the SNB has not been selling gold since 2007.

The second part would apply to around 30% of Swiss gold, which is held outside the country. This means that Switzerland would have 2 years to repatriate c.a. 300 tons, held in the UK (200 tons) and Canada (100 tons).

The most important motion is, however, the last one, because the SNB holds currently only around 8% of its total assets in gold. Therefore, to fulfill this requirement, the SNB will be forced to increase reserves by around 1,500 tons over five years, i.e. 300 tons per year, which accounts for 7.5% of annual global demand of 4,000 tons per year.

Such an increase in demand should, obviously, raise the gold price.

However, nothing is obvious in the gold market. When the Venezuela and Germany requested their gold in the 2011, the gold price actually dropped, which was interpreted by many analysts as the banks' manipulation to cheaply restore the leased Venezuelan and German gold. The similar scenario in this case cannot be excluded.

Investors should remember that the performance of U.S. dollar and economy is probably the biggest driver for the gold price. The huge sales of Swiss gold reserves in the 2000-2007 did not stop the gold boom. And by writing 'huge' we mean 1,600 tons! Moreover, 'yes' to the Swiss Gold Referendum would practically imply an end of the Swiss franc's peg to euro, which would weaken the euro and could potentially strengthen the U.S. dollar.

To sum up, the passing of Swiss Gold Initiative should be a positive for the gold market, however there are many unknowns. Theoretically, to fulfill the requirements, the SNB could sell its foreign currency reserves (mostly euro-denominated assets) rather than buy the gold (or to use a mixture of both measures). Therefore, the direct impact on the gold market would be less strong than generally considered, but the indirect effect on gold due to foreign currency reserves sales is rather ambiguous. We would not expect an escalation of gold price after the possible 'yes' in referendum (let's keep in mind that it's not a certain outcome: for the referendum to pass, it must be approved by both a majority of the public and a majority of cantons). The win could rather increase the gold price by a few percent and provide a firm floor (at least for a while), stabilizing the gold price within the downtrend despite declining gold ETF flows caused by decreasing investment demand.

We were bullish on gold as far medium-term is concerned for the vast majority of the time until April 2013. After that we have generally been expecting lower prices. Are we gold bears? No - we view this decline as lengthy, but temporary. We expect gold to rally in the coming years, but instead of following the buy-and-hold approach, we exit the long-term precious investments at the most unfavorable times and re-enter when things look good again, thus saving a lot of money. Additionally, our Gold & Silver Trading Alerts help you profit from the short-term price swings and our gold Market Overview reports provide insights crucial for long-term investors. We invite you to examine our premium services and encourage you to sign up for our free mailing list today.

Thank you.

 

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