Will Gold reign as most sought currency stabiliser?

Written by: George Chakko, Vienna
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The Swiss Alpine turf is famed for one of world's most beautiful and endeared ski resorts, but also for hoarding world's largest black money and black gold (WWII).

The Swiss people on Sunday voted to reject ‘Save Our Swiss Gold' GIR campaign that demanded 20 per cent of all Swiss National Bank (SNB) assets to be held in gold and this be barred from sale and the return of its 30% gold parked abroad, insisting simultaneously, these are written into law. The event was closely watched by leading Euro-American financial circles and media owing to Switzerland's importance as an elite world financial centre.

Will Gold reign as most sought currency stabiliser?

A yes-vote would have meant an immediate 20% jump in gold prices. Although the event has no implication for India, the debate that preceded it carries valuable hints for India's RBI and Finance Ministry and economists. India being a top world gold consumer, Indian planners are challenged to re-haul a desi monetary policy and go innovative easing gold bondage.

The financial world was keen on the GIR outcome for 2 reasons.

Asset managers around Globe predisposed to tangibles would have been jubilant on a narrow victory as they favoured gold price upswing. Secondly, the rising Swiss Franc was under heavy pressure to appreciate against a falling Euro affecting their export revenues in an economically stagnant Europe. (The Swiss forex has an over-proportionate mass of devalued Euros accumulated.) Interestingly, the SVP campaign garnered strong backing from many prominent Asset companies and from no small celebrity as the former two-time Republican U.S. Presidential candidate Ron Paul, an ardent gold currency sponsor and fan of Alpine economist Ludwig von Mises.

In the voter turnout ( 78%) an overwhelming 77.3 percent of voters said ‘No' and only 22.7 percent said ‘Yes', as per final results announced (Swiss broadcaster SRF) last evening. Earlier Swiss pre-polls had predicted clear defeat for GIR. The coalition partners of SVP (Schweizer Volkspartei) - the Swiss People's Party [a politically conservative Party and Switzerland's largest (27% electorate) ], as much as Swiss Federal Council, the Swiss Parliament and the SNB, were all against GIR that put Swiss credibility as a world financial centre in danger, hence harming Swiss national interest. In a pre-referendum check with the Swiss Embassy in Vienna and SNB sources in Swiss capital Bern confirmed to this writer a clear GIR defeat.

Unlike black money, the Swiss addiction to gold has a different history; it goes back to WWII & Holocaust. The Nazis took gold from millions of exterminated Jews in death and concentration camps, or brutally expropriated from them in pre-WWII Nazi rise to power.

Hitler's Reichsbank melted gold teeth, cigarette cases, jewellery, marriage rings and pocket watches of victims, many removed prior to camp entry. The so extracted bullions were put under ‘Max Heiliger' accounts in Reichsbank; some were stored in abandoned mines (till U.S. soldiers discovered towards war end) and some others deposited in Swiss National Bank for war-time trading purposes. In 1941 when Portuguese dictator Antonio Salazar found the tungsten metal sales (for use in Wehrmacht's Tanks' piercing bullets & armaments) were paid in counterfeit German notes, he demanded payment in gold. About 100 tonnes of Nazi gold were then whitewashed through Swiss banks.

Prior to WWII Switzerland was reputed as the largest gold biz venue in Europe. The SNB reportedly received $400 million worth Nazi gold. Subsequent Swiss governments were at pains to cite Swiss neutrality status as justifying their business with all parties in order to survive as a small nation. Thus it is no surprise in post-War times that gold remained often a Swiss predilection, at times turning into a welcome stigma in Swiss financial conscience. An economically uncertain EU generated a fear in SVP to seek stability via more gold in SNB vaults.

The Swiss Move

Swiss democracy allows frequent referendums on many issues as a sign of their democracy. The SVP proposal that the SNB ought to hold at least twenty percent (20%) of its total assets in gold within next five years and be deposited within Switzerland, and no sale of this gold be allowed and this be constitutionally anchored, was too blatant an interference and over-exacting on the freedom of a Central Bank.

What irked the SNB Chief Dr. Thomas Jordan is the freedom annulled to execute its constitutionally mandated monetary policy which he felt was "unnecessary and dangerous". He found it outright fallacy to link "price stability and the share of gold in the SNB balance sheet." The SNB has 1040 tonnes in gold that is about roughly 8%. A 20% (to the value of SF 104 billion = USD108 billion) would mean an equivalent of about 2667 tonnes of gold. In other words Switzerland would need extra 1627 tonnes of gold in 5 yrs., i.e. an annual stocking up of 325.4 tonnes purchased from open market which is quite a substantial considering world annual gold production is 2500 tonnes only.

But that is not a serious issue. Swiss Franc is a strong currency and any poor country could sell its gold in exchange for Swiss Francs to buy wanted goods on international market. Additionally, the GIR proponents wanted all Swiss gold back into its Alpine repository. At present about 30% (thirty percent) of Swiss gold lies abroad, 10% in Canadian and 20% in U.K. Central Banks. The perception was, in times of financial crises, as when top currencies like Euro or U.S. Dollar get dramatically devalued sparking a ‘currency war', the hard gold will be hard to retrieve, hence better to have them back earliest.

The worry of both SNB and Federal Ministry of Finance in Bern was that Switzerland could get degraded (flight of monetary & other financial assets) once the ban on all gold sales was implemented via law. The demand of 20 percent of SNB assets in gold was a late relic of WWII, as gold then was seen as back-up security bolstering Swiss Franc other than what mere paper money could per se offer. Today Swiss Franc is world's fifth most traded currency, hence the desire of the public to turn to gold understandable.

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Read more about: gold, dollar
Story first published: Tuesday, December 2, 2014, 9:26 [IST]
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