Swiss gold vote has potential to unsettle forex markets
A public referendum to be held on November 30 in Switzerland over whether the Swiss National Bank should have 20% of its holdings in gold could create volatility for CHF and of course gold.
If the Swiss vote for the SNB to hold more gold, that would send gold prices higher, whilst pushing CHF lower with the potential consequences for the EUR being more nuanced. Yet the pressures of meeting a commitment to maintain 20% of its reserves in gold (7.5% at present) should help the SNB maintain its EURCHF peg of 1.20, even if the European Central Bank did eventually go for full scale quantitative easing. At the moment CHF is in a mild downtrend versus the EUR.
To meet the proposed gold requirements, widely estimated around 1,800 tonnes or 2/3rds of annual production, would put the SNB in a difficult position. It faces having to buy more expensive gold in exchange for weakening CHFs or it could use some of its huge EUR reserves, but that would risk putting upward pressure on the EURCHF peg. Nonetheless, it would create speculation as to whether or not EURs would be used, which could become a negative for the EUR.
Much would also depend on the pace of gold accumulation – if it is done slowly over many years then the impact on the gold and forex markets would be more muted than if it has to happen quickly. However, once the gold threshold is achieved, it would involve the SNB having to buy more gold any time it intervened in the forex markets to buy EURs to defend the EURCHF peg – a potentially unwelcome complication for the central bank.
Currently, the SNB has around CHF 460bn (USD 475bn) in foreign reserves with 45% denominated in EURs and 29% in USD.
Gold bugs will probably be denied victory
Fortunately, for the SNB, the chances of the referendum deciding in favour of it holding more gold are probably not that high.
The national parliament is strongly against it as is the SNB. Referenda also don't that often lead to big changes in policy. Yet another hurdle is that to pass, the referendum needs to muster more than 50% of the votes in the country and in the cantons. A further complication is that there will be 3 questions on the ballot paper, which could split the vote.
Nonetheless, the post 2007-8 crisis period does seem to have ushered in a new era where what was once considered extraordinary has become almost normal, such as central banks creating vast amounts of new money through QE.
A potential victory for the Swiss gold bugs therefore can't entirely be ruled out.
If it is passed it would very likely rekindle a rally in gold prices as speculators would hoard the metal ahead of the SNB's purchases. Also, every time the EUR went through a period of weakness (and put pressure on the EUR/CHF peg), gold prices would rise in anticipation of the SNB purchasing.
It would therefore introduce a welcome new dynamic into the market for traders, but not for the SNB, which would effectively be giving market participants a free ride.
By Justin Pugsley, Markets Analyst MahiFX