When you think of Switzerland, what comes to mind?
Rolling meadows? Sweet chocolate? Tax avoidance?
Switzerland offers all those features and more. But here’s a phrase you might have to add to your list: ‘potential financial avalanche trigger’.
The mainstream media has lulled most Aussies into thinking only one vote is taking place this weekend — the Victorian state election. But on the other side of the world, a much bigger game is about to hit its climax.
The sorry squabble between Victoria’s Labor and Liberal parties is chump change compared to Sunday’s Swiss clash.
This weekend could irrevocably alter the course of the global financial markets. We’ll show you the potential outcomes, how you can avoid the fallout, and how you could clean up on the rebound…
On Sunday 30 November, the Swiss people will go to the polls to vote on three separate proposals: an immigration cap, abolishing friendly tax rules for rich foreigners residing in the country, and a new mandate for the Swiss National Bank (SNB).
Today we’ll focus on the third proposal, because it could have the strongest effect on the Aussie stock market. On the ballot is a measure to force the Swiss National Bank (SNB) to build its gold bullion position up to at least 20% of total assets. What’s more, a ‘yes’ vote would prohibit the SNB from selling any gold — and would bring all Swiss gold currently overseas back to the landlocked nation.
Right now, gold makes up 8% of the SNB’s assets. For a central bank with more than US$600 billion of assets, shifting that allocation up to 20% is not a trivial change. So this referendum is a big deal for Switzerland.
It’s hard to imagine any Aussie political party coaxing voters to the polls on matters of central bank policy. They know that impinging on the average Aussie’s weekend with this stuff would go down like a lead balloon. But recent polling shows that Switzerland’s ‘yes’ vote has a real chance of getting up on Sunday.
So what has driven the Swiss to a referendum about gold?
People across the Western world — not just in Switzerland — are getting fed up with central bank policy. The US Federal Reserve, European Central Bank and the Banks of Japan and England have printed so much money over the past few years that they’ve made Scrooge McDuck look like a pauper.
Since the global financial panic six years ago, bureaucrats have tightened their grip over the financial markets. Central bankers now use their policy tools as weapons to inflict economic pain on the rest of the world. These attitudes are unprecedented — and with trillions of dollars at stake, the outcomes are potentially hazardous.
On top of that, most ordinary people have no idea what central banks are really doing. They just have a gnawing sense that the economic system is working against their best interests. But gold gives an impression of permanent, intrinsic value.
‘Gold bugs’ have harnessed that feeling into a political force in Switzerland. They view a ‘yes’ vote on Sunday as the first step on a journey back to a currency linked to the price of gold.
The conventional wisdom suggests a ‘yes’ vote on Sunday would create a permanent bid for physical gold, and put a rocket under the commodity’s value. But we don’t see things that way…
The real game
Although those billion-dollar figures might sound impressive, the reality is that physical gold trade is less than a sideshow compared to the total market for the yellow metal. Futures, options and other gold-linked derivatives dwarf the demand for actual bars of gold. This kind of simple trade represents less than 2% of the gold market.
A ‘yes’ vote might force the SNB to buy up to 1,500 tonnes of physical gold to meet the 20% threshold. That new demand could put a floor under the gold price. But the demand would spread itself over the five years the SNB would have to meet the target. Based on the World Gold Council’s estimates, buying 300 tonnes of gold each year until 2019 could add around 7% to annual global demand for the physical commodity.
But remember that demand for the physical metal is only a small driver of the overall gold market. It’s wrong to assume a ‘yes’ vote will send the gold price skyrocketing.
On the other hand, a ‘no’ vote will break the spirit of ‘gold bugs’ around the world. They have positioned themselves for a surge in the gold price after this week. A ‘no’ vote would negate that trade idea…and there’s no telling how many gold speculators could rush to reverse their long gold positions at the same time. That would be bearish in the short term for a commodity that has already significantly declined in price over the past few months.
Weighing the risks, our view on gold is bearish. That’s been our resource analyst Jason Stevenson’s position for some time, and his view has been the right one. It never hurts to own a little of the metal as part of a diversified investment portfolio…but the dreams of gold bugs fail to recognise reality.
Central banks are not showing any signs of weakening their vice-like grip over the financial markets. That means if you want to invest for success, you have to play their twisted game. That means as long as the officials are doing everything in their power to keep interest rates low — you should be buying stocks to reap the rewards.
Editor, Money Morning