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The Swiss Gold Referendum - Cat Among The Pigeons

Commodities / Gold and Silver 2014 Nov 23, 2014 - 02:33 PM GMT

By: Andrew_McKillop


November 30, 2014
On November 30, Swiss voters head to the polls on three separate questions: abolishing a flat tax on resident foreigners who do not work or presently pay income tax, a numbers-based cap on immigration, and a proposal to radically increase Swiss gold reserves and forbid the sale of reserves. Gold loans which would bring down the reserve total below th new target for reserves, sometime in 2019 would also be forbidden, but this is only implicid in the referendum question.

The referendum, if passed, will mean that Switzerland's National Bank (SNB) must hold 20% of all its financial and monetary assets as gold. The country would notably repatriate the 30% of its gold presently held by the Bank of England (20%) and Bank of Canada (10%).

According to the WGC (World Gold Council), as of September Switzerland held a total of 1040 tonnes of official gold covering 7.7% of the Swiss national bank's present $544 billion of assets (compared with 16% for Germany and a claimed 19% for the US). These assets  mostly comprise foreign exchange and national debt-related instruments of other countries, including the USA and Canada, the Eurozone countries, the UK and Japan.

According to the site Goldswitzerland (, which is heavily in favor of the refrendum, the amount of gold bullion that Switzerland must buy and repatriate to reach the proposed 20%-of-SNB assets rule, which the referendum asks votters to decide on, will be at least 1500 to 1700 metric tons.  World total "frsh gold" supply from mining will attain about 2750 tons or a little more than that, in 2014. Goldswitzerland underlines that from 1936 to 2000 the Swiss national bank held an average of about 40% of all its assets in the form of gold. WGC and SNB data shows that Swiss official bullion reserves in the years 2000-2001 were around or above 2500 metric tons.

Cat Among the Pigeons

Gold bullion data, even for developed countries, is notoriously "flexible" and very often contexted by IMF-arranged swaps of physical gold between central banks, often "seamlessly linked" with related operations by the BIS-Bank for International Settlements, nicknamed "the central bank of the world's private banks". but the potential Swiss gold repatriation demand on the Bank of England has major political implications. If the referendum passed and if the BOE truly holds 20% of foreign-held Swiss national gold – this would represent at least 200 metric tons.

As frequently referred-to in emotional terms during the Scottish referendum debate by leading No campaigners, notably ex-Chancellor Gordon Brown, the Bank of England's official 310.3 tons of gold, as of September 2014, would be "heavily affected" by an indenepdent Scotland demanding the repatriation to Scotland of its 8.5% share of this gold. This would be about 26 metric tons.

The Swiss claim would be nearly 8 times larger than this, reducing the BOE's official reserve to a pitiful 110 tonnes! Germany, for example, officially holds about 3500 tons and the French national bank holds about 2500 tons. Both the Dollar / Euro and GB pound / Euro cross rates would rather certainly be affected. Gold prices would rather certainly receive a sudden boost.

The CHF Swiss Franc would almost certainly jump against all other currencies, especially the GB pound and Canadian dollar, and this outcome features in the worried campaign for a No vote on 30 November, a campaign that opinion polls currently suggest the Noes will win. Nevertheless, the polls also suggest a substantial number of Yes votes – exactly as in Scotland's independence referendum campaign. Here, the sequels of the defeat for the Yes campaign were very poorly forecast, for example that "full independence for Scotland will take decades" and that the SNP which stands for independence "will be shunned by voters". The exact opposite happened. Scotland's independence is now almost certain, and paid-in membership of the SNP has quadrupled since the referendum.

The November 30 referendum comes hard on the heels of the decision, announced November 17 by Germany's Budget minister that his country has now indefinitely suspended its demand for the full repatriation of Germany's share of the approximately 670-tonne gold loan it made with France to the US Federal Reserve in 2010. Germany had requested its full repatriation since January 2013 but only around or about 37 tons was forthcoming from the USA. Numerous pretexts were used by US authorities to "explain" its ability to receive the gold, but its nability to return it. Concerning the French share of this gold loan, French official comment is succinct. No comment.

Arguments used by No campaigners include Switzerland currently holding 1040 tonnes of official reserves, which is the highest amount of gold per capita (4.09 Troy ounces per citizen). At the end of the 1990s however, as mentioned above  the SNB held 2500 tonnes or more than 10 ounces per citizen and the SNB has not only been a major lended of gold, but has also been the biggest national seller of gold in tonnage terms since year 2000.

Walk on Gilded Splinters

The implications of the vote are huge. With a Yes vote, the SNB would have to purchase or repatriate at least 1500 tonnes of gold to meet the 20% threshold, for which the timeline would be some date in 2019, but this date could be "flexibilised". Relative to Chinese official and privare gold buying in 2014 to date (about 3000 tons) and the same for India (about 1000 tons) it could be argued that the world's mountains of "paper gold" but molehills of the yellow metal could be maintained in their present limbo state of Chinese pottery dogs staring at each other while nothing changes. The gold market, theoretically, could soldier along as it has since 2011. Occasional surges of the gold price could go on being deftly smashed down by coordinated market rigging.

Apart from the Swiss Franc and its possibly rapid appreciation hitting Swiss exporters, one clear loser would be the Bank of England, which would be forced to find and buy at least 200 tonnes, with an approximate marlet price tag of around $9 or $10 billion at current prices for gold. This additional "borrowing requirement" for the UK government, already admitting a deficit edging closer and closer to 100 billion pounds ($156 billion) for 2014 would not be enormous, for a debt-and-deficit strapped government trying to keep the growth party going until the May 2015 general elections. These will almost certainly result in a Tory-UKIP coalition government for England, with a major residul role for Rump Labour, the English Labour party stripped of its "safe seat' members in Scotland by the likely rebound vote for Scotland's SNP. In a classic hung parliament the debate on what to do about th wilting GB pound will be a treat to view!

The Swiss move, whether the result is Ye or No will be an unmitigated disaster for the fragile and artificial world monetary status quo. It can only reinforce Chinese, India, Russian and other country buying of the yellow metal as currencies are thrown into epic volatility. While it was not too late for the German government to pull back from the abyss and suspend its demand for gold repatriation from the US Fed, this essentially political call could resume, and with it a new challenge to the IMF's gold swap operations, the BIS's related shuffling of the metal between "the bullion banks" and other banks, and a period frenetic speculation on gold.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - 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 advisor.

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