Switzerland’s central bank calls to thwart gold vote
Switzerland’s central bank (SNB) is stepping up efforts to block a populist motion launched last year that would force the financial institution to almost triple the proportion of reserves held in gold.
The Alpine country will vote on Nov. 30 on the so-called “Save our Swiss Gold” initiative organized by the right-wing People’s Party, or SVP. The motion calls for the central bank to hold at least 20% of its assets in gold, which currently make up about 7.5% of its total assets. In addition it should be prohibited from selling any gold in the future, and all of its reserves of the precious metal must be stored in Switzerland.
The Swiss Federal Council, the seven-member cabinet, as well as both houses of parliament have recommended voters reject the motion.
“The Swiss electorate will vote on an initiative which, paradoxically, would severely constrain the SNB’s room for maneuver in a future crisis,” SNB’s vice president Jean-Pierre Danthine said last week in a speech prepared for delivery at a conference in Martigny.
No way back
The proposed ban on future gold sales would have even more serious consequences for the SNB as an increase in gold holdings couldn't be reversed, Danthine said.
“This would severely restrict our room for maneuver, and furthermore because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the government and cantons would be impaired.” he said.
In other words, it would force the bank to buy gold every time its balance sheet expands and to sell euro every time it contracts.
Had the terms of the initiative been in force three years ago, it would have obliged the SNB to buy gold as well as euros in large quantities to defend the currency floor of 1.20 Swiss francs per euro, Danthine added.
The floor was imposed in September 2011 to prevent the Swiss economy tipping into recession and head off the danger of deflation. Since then, the SNB’s foreign currency holdings have ballooned – rising from about 204bn Swiss francs at the end of 2010 to 470bn Swiss francs last August. Despite the difficulty of managing such a rapid increase, the SNB says the minimum exchange rate is still “the key instrument to avoid an undesirable tightening of monetary conditions”.
According to FT.com, it is not yet clear whether the measures stand any real prospect of becoming law:
"Population growth and mass communication have made it easier to gather the 100,000 signatures needed to put initiatives to a public vote in Switzerland, but only 10 of 66 initiatives that have gone to referenda since 2000 have passed. Opinion polls will not appear until later this month, and have proved unreliable before previous votes.
"But Scotland’s independence referendum last month was a reminder of how rapidly political risks can come to the fore in currency markets.'
Currently, the bank has 1,040 tons of gold, with roughly 70% stored in Switzerland, 20% at the Bank of England and 10% at the Canadian central bank.