Swiss Timing Could Send Gold Ticking Much Higher

by David EngstromJanuary 20, 2015

If the Swiss are known for anything it is their banking prowess and their appreciation for perfect timing.  As you watch their movements in the financial realm, their cunning and expertise in these areas is revealed.

On November 30, the Swiss gold referendum went to vote and was defeated.  If passed, the Swiss would have been forced to buy some 1500 tonnes of gold to replace reserves sold during the decade or so prior.  Frankly, it seemed like a stupid move.  If adding gold to your reserves was the true intent, why would you introduce and then pass a law in front of the entire world that would require you to buy more gold?

As experts followed the story, many speculated the referendum would pass because the Swiss love their gold.  Had it passed, it would surely have provided upward momentum to the gold price.  That was the belief.  Looking at the gold charts, the entire ordeal basically ended up being a non-event for the gold price, either in anticipation of the referendum passing or its ultimate defeat.  It was as though the smart money knew the Swiss were not so naïve as to announce their intent to buy more gold before they actually had a chance to buy more gold. Why drive up the price today of something you desire to own tomorrow?

In my opinion the entire exercise was a diversion.  It does make sense that the Swiss want to own more gold.  And, if this be the case, it would make sense to try and convince the world you DO NOT.  What better way to convince the world of this than to propose a law that would require you to buy more gold and then defeat it?  

Since 2009, Central banks of the world have been net buyers of gold, realizing that currencies, due to massive money printing, will become devalued.  If currencies lose value, loans made today are likely to be paid back in currency worth less than it was when the loan originated.  Especially, if inflation rises.  Even if a bank borrows money near zero today, to earn a 2% or less return as you would if you bought treasuries, inflation eats up all earnings and the possibility of negative real returns becomes real.  You just don’t stay in business if you don’t make any money.  That’s what central banks are doing today.  Hedging against the loss of currency value over time.  Hence, they are now net buyers of gold.

As the world became convinced the Swiss do not want more gold, the brilliance of the move to defeat the referendum becomes clear.  If you want to own more gold, what better way to do it at the price you want than to raise the value of your own currency.  The Swiss’ recent move to de-couple the Swiss Franc from the Euro shocked the world.  Overnight the Euro lost 20 to 30% of its value against the Swiss Franc.  Prior to the move, the value of the Franc was pegged at 1.20 per Euro.  After the move the Euro immediately fell to .85 Francs and currently sits at 1 Franc.  There goes that next ski trip to the Alps as that trip now costs Europeans 20% more Euros than it did just days ago.

So, how did this affect the gold price for the Swiss?  Let’s look at the numbers – they don’t lie.  On January 1, the price of gold in Euros was 991 Euros per ounce.  Now let’s translate these numbers to Swiss Francs.  On January 1, when 1 Euro was worth 1.2 Swiss Francs, the price of gold was 1189.2 Francs per ounce.  Today an ounce of gold priced in Euros is 1100 Euros per ounce.  If 1 Euro now equals 1 Franc, the math is easy.  Today’s gold price in Swiss Francs is also 1100 Francs per ounce.

In the wave of a magic central bank wand, the Swiss just discounted their gold price by 8% - OVERNIGHT!  We can only speculate but, it appears all along the Swiss wanted to own more gold.  Now, they just made owning more gold as easy as resetting one of their fine Swiss watches.

And, what is the gold price doing globally?  Yup it’s ticking higher. 

As always much of what you just read is my opinion.  You may not agree but the facts speak for themselves.     

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