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Why the Swiss central bank needs more gold

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Why the Swiss central bank needs more gold
Photo: AFP/File
11:27 CET+01:00
Eric Schreiber, an independent asset manager based near Morges in the canton of Vaud, argues why Swiss voters should say "yes" to a referendum initiative that calls on the Swiss National Bank to hold more gold.

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.

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.
 

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