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Swiss Capital Flows Indicate Metal Surge in Europe

Commodities / Gold and Silver 2011 Aug 11, 2011 - 05:55 AM GMT

By: Dr_Jeff_Lewis


Behavioral finance tells us that behind every mathematical proof of a financial concept is a human element.  Human nature plays itself out each day, as we interact with our portfolios, investments, and the markets to find the “equilibrium price” as determined by all of our errant thoughts.

By reversing the logic of behavioral finance, investors can find a better understanding of the financial markets.  One topic that should earn more time in financial conversation is the ties between currency values and monetary metals.

Europe in Focus

In looking to the markets to understand the investor, we can look at the Swiss Franc and gold to determine what investors see in a mostly efficient market.  Additionally, silver helps us to navigate the importance of finance in silver’s value, as well as determine an industrial premium for its valuation.

As previously reported, the Swiss Franc is the currency for anti-Euro interest.  Investors who want to buy into the European markets but who want to avoid the European Union tend to invest in the Swiss Franc, a currency that earns respect for its government’s lasting neutrality.  The Swiss Franc is, by some measures, also backed by large stores of gold held at the central bank.  Relative to M3 money supply, the Franc is roughly 10% backed by stores of gold at the Swiss National Bank. 

Naturally, at only a 10% backing, the Swiss Franc isn’t earning its rise from the gold alone.  If that were the case, you could extrapolate the rise in gold for the year, divide by 10, then arrive at how much of the move can be attributed to gold.

Behavioral Lift

Based on this simple mathematical proof, the Franc’s 18% rise for the year isn’t entirely due to gold.  However, the rise does show us the extent to which the Franc is seen as a store of wealth like gold.  And to this end, we can also see how financiers in Europe see the two currencies.

Year-to-date the Franc has advanced 18% against the dollar.  Gold earns a 16.6% increase, and silver a whopping 23.6%. 

The correlation in the movement is what is most interesting, however.   Examine this chart of the USDCHF (US dollar value in Francs) to GLD and SLV, the gold and silver ETFs, respectively:

You will notice that the negative correlation between gold and the USDCHF value couldn’t be more obvious.  Not only have each moved up or down by the same amount (16-18%), but they move in tandem.  One is up, the other is down.

This isn’t just a typical gold and dollar trade, where each moves in opposite directions.  The dollar index is down roughly 7% for the year.  The Franc is the European gold. 

Perhaps more importantly, we can conclude from the correlation in prices that Europeans are now introducing the importance of gold into their investment portfolios.  In buying the Franc for asset protection, recent concerns in Italy and Spain may give way to large, direct investment by Europeans into the gold and silver markets, which is the next logical step from the Swiss Franc.  The Swiss Franc, unlike gold or silver, can still be affected by a central bank—the Swiss National Bank.

Going forward, movements between the Franc, gold, and silver should be watched with careful eyes.  Should we see a reversal in the correlation to a point at which the Franc declines and monetary metals rise, it may just be that Europeans are hopping on top of the next wave in the decades long surge in monetary metals.  This trend is only developing, but it is one to watch closely.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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