The resurgence of concerns over the long term solvency of debt laden Eurozone countries like Greece, Spain, Portugal, Italy and Ireland has led to refreshed selling of the Euro against the other major currencies since early April.
Although the market in EUR/USD now seems to have stabilized just over the psychological 1.3000 level, deep questions remain among international investors as to whether the European Central Bank or ECB will be able to manage the ongoing European debt crisis over the coming few years without the trade bloc disintegrating or the common currency being further devalued by the forex market.
Furthermore, investors worried over the ECB’s recent notable balance sheet expansion, which has reportedly grown by roughly 30 percent since current ECB President Mario Draghi took over last November, have returned to buying the Swiss Franc as a relative safe haven for their investment funds.
Swiss Franc No Longer Convertible Into Gold
Nevertheless, two key factors have substantially diminished the Swiss Franc’s historic status as a safe haven currency with relatively low inflation. The first and primary factor is that the Swiss Franc is no longer convertible into gold, having been the last major paper currency to leave the Gold Standard after a referendum on the issue took effect on May 1st of 2000.
Switzerland’s 40 percent gold reserve requirement was also suspended at that time, and the country’s gold reserves subsequently fell sharply to only 20 percent by 2005. Switzerland had adopted the Gold Standard in the late 1870’s until convertibility was suspended in 1914. Its currency was then devalued before returning to the standard in the 1920’s.
SNB Deliberately Weakens Swiss Franc by Forex Market Intervention
The second factor is that Swiss National Bank officials shocked the forex market when they indicated that they intend to defend the 1.2000 level in EUR/CHF against all speculative attacks, with an “unlimited” supply of currency. This new policy was announced when the cross had been recovering after having dipped as low as the 1.0063 level last August.
To perform this herculean feat of central bank manipulation, which sent EUR/CHF rocketing almost eight big figures higher in one single dramatic day last September, it seems the SNB will be just printing more money, thereby diluting the value of their currency even further.
This well publicized currency market intervention had a similar effect on the Swiss Franc as the highly problematic quantitative easing policies employed other central banks, like the Federal Reserve, the Bank of England, the ECB and the Bank of Japan, which have consistently weakened their respective currencies at the expense of hard currencies like the precious metals.
Metals Look Better as Market Retests SNB’s 1.2000 Intervention Point in EUR/CHF
Since the beginning of April, the forex market has tested the Swiss National Bank’s resolve to defend the 1.2000 level in EUR/CHF on two separate occasions, with the market falling as far as 1.2034 on April 5th and then falling below the intervention level to hit a low of 1.1997 on April 6th.
Although the EUR/CHF market has subsequently recovered slightly to trade as high as 1.2032 by April 11th, it has remained at low levels, indicating that investors are still willing to dump their Euros for the ever less valuable Swiss Francs being printed by the SNB.
Egon von Greyerz, the founder and managing partner of Switzerland’s Matterhorn Asset Management, was recently quoted by King World News as saying that, “The problem is that Switzerland is expanding its balance sheet like every other central bank.”
Furthermore, his view was that precious metals are probably in the process of finding a medium term bottom, saying that, “Very soon, these investors will realize that the only protection is to buy gold.”
By Dr. Jeff Lewis
Copyright © 2012 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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