• Switzerland's news in English
Why the Swiss central bank needs more gold
Photo: AFP/File

Why the Swiss central bank needs more gold

Eric Schreiber · 25 Nov 2014, 11:27

Published: 25 Nov 2014 11:27 GMT+01:00

Facebook Twitter Google+ reddit

Swiss voters will decide in a referendum this Sunday whether to ban the Swiss National Bank (SNB) from selling current and future gold reserves, repatriate foreign holdings, and mandate that gold must comprise a minimum of 20 percent of central bank assets.

The SNB does not usually comment on political referendums.

However, in this case it has done so quite vocally.

The central bank’s primary objections to the initiative are threefold. 

First, it claims that gold is “one of the most volatile and riskiest investments”.

Second, that a 20 percent gold requirement will lower the “distribution to the confederation and the cantons”.

And third, that the 20 percent gold holding requirement will interfere with its ability to conduct monetary policy and complicate its efforts to maintain “the minimum exchange rate”, the “temporary” policy of pegging the Swiss franc to the Euro initiated in 2011 and still enforced to this day.

Story continues below…

The first two concerns can be quickly discounted. Gold is indeed volatile at times but so are bonds and equities.

In recent years Greek, Spanish, Italian, Irish and other European bonds have been far more volatile. The Swiss stock index, lost over 50 percent of its value on two separate occasions between 2000 and 2009 while gold steadily rose at an annual rate of 8.5 percent.

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.

Prior to the change in the Swiss constitution, the Swiss franc was backed by a minimum amount of 40 percent gold unhindered during the post Second World War period.

The SNB is correct in implying that today a partial gold backing would make its policy of weakening the franc against the euro more difficult.

The central bank has raised this as a major reason for voting against the referendum when in fact it is the primary reason for voting yes.

The Swiss population voted down two separate initiatives, in 1992 and 2001, to join the European Union (EU).

Despite the popular votes, Switzerland was integrated into the EU initially by political means through a series of bilateral treaties and then later in 2005 by popular vote in favour of the Schengen agreement.

Laws between the EU and Switzerland were harmonized and Swiss border controls with EU member countries were abolished to permit the free flow of people, goods, and services.

Unfortunately, Switzerland’s stealth ascension to the EU made a public vote on whether or not to replace the nation’s sovereign currency the franc with the euro politically impossible.

To circumvent the issue, the SNB decreed on September 6th 2011 that it would enforce a “temporary” peg of 1.20 francs to the euro, to fend off euro flows entering the country due to the financial crisis that was engulfing Spain and Greece at the time.

The Swiss franc would henceforth be permitted to lose value against the euro but never to strengthen beyond 1.20.

In this manner, monetary policy for Swiss affairs was quietly handed over to the European Central Bank (ECB) while maintaining the mirage of a Swiss sovereign currency before the public.

The Swiss franc was transformed overnight into a derivative instrument of the euro without the ratification or knowledge of the population.

The policy remains in place although the crisis in Spain and Greece has officially ended according to the EU.

Since the peg was put into effect the SNB balance sheet has increased by 350 percent.

At over 83 percent of GDP, the Swiss National Bank’s euro bond purchasing program is over three times greater than the US Federal Reserve’s or the ECB’s relative to the economy.

SNB “assets” have surpassed 520 billion francs and keep growing.

By bloating its balance sheet the SNB has created a significant foreign exchange risk exposure for itself.

It cannot meaningfully reduce its euro bond holdings and extricate itself from currency risk without incurring significant losses selling at a rate below the 1.20 peg.

China, a country that has pegged its currency to the US dollar for decades, finds itself in a similar predicament.

However, the Chinese and the Swiss situation differs in one very important manner. China is a net exporter of goods and services to the US.

Chinese losses on the import side of the trade balance are more than offset by gains on the export side of the trade balance.

Switzerland, on the other hand, is a chronic net importer of goods and services from the EU and thus does not have the offsetting EU exports in sufficient quantity to compensate for the damage the peg inflicts on its domestic purchasing power.

The SNB impoverishes the domestic Swiss population by increasing the price of all EU products.

This is perhaps the most egregious and certainly least publicized effect of the central bank's action.

Each time a Swiss resident purchases a good or service made in the EU, he or she is rendered poorer by the actions of the country's own national bank.

The problem of central bank overreach is certainly not isolated to Switzerland.

Since the financial crisis six years ago, central banks around the world have interfered in and manipulated bond, foreign exchange and equity markets on an unprecedented scale.

These unelected institutions have actively redistributed wealth from one group to another and compete in a continual race to the bottom to reduce the purchasing power of their national currency.

For over three years the SNB has been operating opaquely behind the scenes substituting another currency for its own, converted its citizen’s savings into euros, and imposing a stealth tax on European imports without public consent.

A “yes” vote for the gold referendum is a first step towards redressing the imbalance that exists between the SNB and the people of Switzerland.

A “yes” vote will begin a process to restore restraint, accountability, and transparency on an institution that has reinvented itself as a hedge fund and significantly expanded into areas of policy far beyond its original remit.

Central banks should be lenders of last resort and systemic regulators.

In a direct democracy, decisions regarding taxation, membership in trade/political unions, and the autonomy of the national currency should be determined by popular vote not decreed or circumvented by central bank edict.

For more news from Switzerland, join us on Facebook and Twitter.

Eric Schreiber (news@thelocal.ch)

Facebook Twitter Google+ reddit

Your comments about this article

Today's headlines
‘Scary clown’ craze hits streets of Zurich
Photo: Pedro Pardo/AFP

Police in Zurich have warned so-called ‘scary clowns’ that they could face charges, following a number of incidents in the city.

VIDEO: driver chases runaway car on Swiss motorway
Image: Neuchâtel police

Shocking footage shows the moment a man dodged lorries to chase after his runaway car on a Swiss motorway.

Saas-Fee crowdfunds low-cost season ski pass
Saas-Fee is hoping to attract 99,999 season pass holders. Photo: Denis Emery/Photo-genic.ch

Skiers could get their hands on a whole season pass for just 222 francs ($223) in the Swiss resort of Saas Fee this winter – if enough people want one.

Swiss billionaire fined for dodging import tax
Urs Schwarzenbach owns the luxury Dolder Grand hotel in Zurich. Photo: Wilhem Rosenkranz

Urs Schwarzenbach faces a $4 million fine for failing to properly declare some 200 artworks imported into Switzerland.

Muslim woman wins headscarf court battle
Photo: Jack Guez / AFP

A Swiss court has ruled against a company that fired a longtime employee after she began wearing the Muslim headscarf.

Montreux throws hat in Olympic rings
Could Montreux host the 2026 Games? Photo: Ivo Scholz/Swiss Tourism

Montreux is to put itself forward as the host city for the 2026 winter Olympics as part of a potential bid by the cantons of Valais and Vaud.

Geneva car share scheme could help reduce city traffic
Catch a Car is aimed at short hops within a city. Photo: Catch a Car

Catch a Car, already in Basel, launches in Geneva next month.

Swiss women will ‘work for free’ for the rest of year
Female employees in Switzerland earn 19.3 percent less than their male colleagues. File photo: Randy Kashka

Switzerland's gender pay gap means from today, Friday October 21st, women in the country will effectively be working for free for the rest of 2016.

Swiss luxury watches stolen in Paris raid
Police outside the Girard-Perregaux watch store on Thursday. Photo: Bertrand Guay/AFP

The 10 Girard-Perregaux watches are worth half a million euros in total.

Brother-in-law arrested over murder of Swiss teacher
The victim worked in a school in Stabio, near the town of Mendrisio. Photo: Oliver Graf

The primary school teacher was found dead in Ticino earlier this week.

Photo: Richard Juilliard/AFP
Man makes Geneva airport bomb threat ‘for a joke’
Sponsored Article
Last chance to vote absentee in the US elections
Photo: AFP
Solar Impulse team reveals plans for unmanned plane
File photo: Martin Abegglen
Swiss to vote on passport rules for 3rd gen foreigners
Photo: AFP
Swiss wingsuit hotspot Lauterbrunnen won’t impose ban
Photo: Swiss Tourism
Six reasons Switzerland isn’t as boring as you might think
Photo: Swiss Tourism
Report: Switzerland one of world’s best places for girls
Photo: The Local
Thief returns Swiss cow bells worth thousands
File photo: Wikimedia Commons
One in three rapists isn’t locked up: statistics
Photo: activistin.ch
Tampon-tax protest turns Zurich fountains red
Photo: AFP
Geneva police to lift ban on bearded officers
Photo: Marcel Gillieron/AFP
Suicide chef’s restaurant keeps Michelin stars
Photo: Lara de Salis
11 things the Swiss get tired of hearing abroad
Photo:  Ivo Scholz/Swiss-image.ch
Survey: expats in Switzerland have money but few friends
Photo: AFP
Swiss press criticize Bern’s 'capitulation' on immigration
Photo: Jura Trois Lacs tourism
German ex-policeman is Swiss city’s new hermit
Photo: Dmitry A. Mottl
Ticino votes to favour local workers over foreigners
Photo: file
Some deodorants could cause breast cancer: Swiss study
Photo: Royal Savoy
In pictures: Inside the latest Swiss luxury hotel
Photo: AFP
Geneva airport bomb hoaxer faces 90,000-franc bill
Photo: Schaffhausen police
Mother leaves toddler son alone in car to go clubbing
Photo: Fabrice Coffrini/AFP
Swiss populist attacked by knife-wielding pensioner
jobs available