In today's Swiss gold referendum, roughly 78% voted against expanding central bank gold reserves to 20% of central bank assets from the current 7%, according to Swiss national broadcaster SRF. The vote is a blow to the movement to “Save Our Swiss Gold” that had the hopes of moving Switzerland back toward a gold standard which the country left in 1999. Since then, there has been no requirement for the country's currency to be backed by gold and as a result central bank gold reserves have waned considerably. The referendum results are not surprising given earlier polls had predicted the “no” camp would win by a large margin, however the results have mitigated concerns that increased demand from the Swiss National Bank (SNB) could cause a spike in gold prices. Despite the criticism of easy monetary policy within the "Save Our Swiss Gold" movement, to maintain the current exchange rate floor on the Swiss franc against the euro, there is mounting pressure on the SNB to lower interest rates into negative territory on par with the ECB that lowered its key deposit rate into negative territory back in June.
Thomas Jordan, president and chairman of the Swiss National Bank (SNB) (Photo credit: Bloomberg... [+]
Swiss central banker Thomas Jordan says initiative would have hindered monetary policy
Ahead of the gold vote, Swiss National Bank (SNB) president Thomas Jordan commented that the popular vote on requiring the central bank to keep 20% of its assets in gold would hinder the central bank’s ability to conduct monetary policy. In a statement obtained by the Wall Street Journal, Jordan said that “The initiative is both unnecessary and dangerous”, saying further that “It is unnecessary because, under the current monetary order, there is no link between price stability and the share of gold in the SNB balance sheet.” Jordan also pointed out that Switzerland’s stock of gold is high compared with other central banks and that the SNB has no further plans to sell or purchase gold in the future.
Gold standard backers upset with the result
The organizers of the initiative, members of the Swiss People’s Party, say the gold reserve measures were needed because the SNB’s policy of capping the value of the franc has left its balance sheet with a surplus of euros which have been devalued in the wake of the financial crisis. They also have been vocal against the devaluation of the Swiss franc, which is intended to help Swiss exporters and the Swiss economy.
Former U.S. presidential candidate and former congressman Ron Paul, who is also a well-known gold standard backer, came out in favor of the Swiss "yes" camp on expanding central bank gold reserves ahead of the vote, saying in an opinion piece on his website, "The Swiss people appreciate the work their forefathers put into building up large gold reserves, a respected currency, and a strong, independent banking system. They do not want to see centuries of struggle squandered by a central bank".
Current exchange rate floor on the Swiss franc increasing pressure to lower interest rates in negative territory despite gold vote
Analysts believed the “Save Our Swiss Gold” initiative could have challenged the SNB’s commitment to a three-year-old cap of 1.20 Swiss francs per euro. Such speculation has already pushed the franc to its highest level in more than two years.
The Swiss National Bank currently has a foreign exchange floor tying the Swiss franc to the euro and has been buying euro in the hope of keeping down the value of the franc and easing the pressures on Swiss exporters. The Swiss franc is historically is seen as a safe haven currency in Europe and previously had a tendency to appreciate steeply in market turmoil before the exchange rate limit was announced.
Gold prices have also been affected by the prospects of the vote, though last week gold fell more than 1.5% following a poll which showed Swiss voters were unlikely to approve the measure.
While the “Save Our Swiss Gold” movement reflect some Swiss citizens’ negative opinion on easy monetary policy, there has been mounting pressure on the Swiss National Bank to cut interest rates below zero to keep the Swiss franc below its exchange rate floor. The European Central Bank (ECB) cut its deposit rate below zero in June and has started engaging in long-term asset purchases. This has weakened the euro against other major currencies, including against the franc, with the euro trading just above the limit set by the Swiss National Bank.
Libor three month futures on the Swiss franc suggest that the market is currently pricing 0.11% in cuts by the end of next year, or a 45% probability of a 0.25% cut by the end of 2015, according to a trader at Societe Generale in a Wall Street Journal interview.
As the Fed looks to begin raising interest rates in 2015, central bank watchers will similarly be expecting the SNB to lower interest rates into negative territory next year.
