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Swiss vote provokes '6,000-year gold bubble' attack
'Save Our Swiss Gold' referendum is a primordial scream against a world of quantitative easing but would paralyze the Swiss National bank
The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again Photo: Alamy
By Ambrose Evans-Pritchard, International Business Editor
3:32PM GMT 27 Nov 2014
416 Comments
Five million Swiss voters will decide on Sunday whether to force the Swiss National Bank to repatriate all its gold from vaults in Britain and Canada, boost its holdings of bullion to 20pc of foreign reserves and then keep the metal forever.
The “Save Our Swiss Gold” referendum is a valiant attempt by Switzerland’s army of gold bugs - and the populist Swiss People’s party (SVP) – to lead the world back to the halcyon days of the international Gold Standard. It is a primordial scream against a quantitative easing and money creation a l’outrance by the leading central banks.
Yet there is a snag. The Swiss National Bank (SNB) is the biggest printer of them all in relative terms, far outstripping the Bank of Japan, let alone the US Federal Reserve or the Bank of England – mere amateurs at this game.
The SNB has boosted its balance sheet to a colossal 83pc of GDP in a maniacal – but fully justified – effort to stop the Swiss franc appreciating beyond 1.20 to the euro, and to head off deflation. It vowed to print whatever is necessary to buy foreign bonds and defend the exchange rate. It has been true to its word since 2011.
At one stage it was mopping up half of the entire sovereign bond issuance of the eurozone each month, a scale of action that the European Central Bank’s Mario Draghi can only dream of. During the eurozone debt crisis, Standard & Poor’s even accused the SNB of becoming a conduit for capital flight, via Switzerland, to German, Dutch and French bonds, and therefore indirectly exacerbating Euroland's North-South rift.
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You have to smile when you hear Swiss gold enthusiasts complaining that these foreign bonds – bought with electronic fiat francs created out of thin air – are now losing value as the euro slides against the dollar. But then we all suffer from congnitive dissonance.
The result of this buying blitz is that the SNB now has a balance sheet of 522bn francs (£345bn). Only 7.5pc of this is in gold, some 1,040 metric tonnes. It will have to buy 1,733 tonnes to reach the 20pc target mandate by 2019 if the vote passes.
Gold bulls are snorting. The world’s annual mine output is roughly 2,500 tonnes. We can all do the arithmetic. The SNB might persuade a friendly central bank to sell a few crates, but last year the central banks were net buyers. Led by Russia and other BRICS states, they bought 367 tonnes.
Citigroup’s Willem Buiter has poked fun at the Swiss plan, and at metal fetishism in general, in a lascerating report entitled Gold: a six thousand year-old bubble revisited.
“Making it illegal to ever sell any of the gold the central bank has now or acquires in the future would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. Its value is therefore zero.”
Mr Buiter says gold is a “fiat commodity” of almost no intrinsic value, coveted only as an asset “to the extent that enough people believe it has value as an asset”.
Personally, I find this a rarefied argument, bordering on Jesuitical, a subjective preference dressed as science. Nothing has intrinsic value beyond what we give it, including the things that Mr Buiter likes. But let us not quibble.
“Gold is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store. It has no significant remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses,” Mr Buiter adds.
“The cost and waste involved in getting the gold out of the ground only to but it back underground in secure vaults is considerable. Historically, gold was extracted from its ores by using mercury, a toxic heavy metal, much of which was released into the atmosphere."
"Today, cyanide is used instead. Cyanide spills (which occur regularly) can wipe out life in the affected bodies of water. Runoff from the mine or tailing piles can occur long after mining has ceased. From a social efficiency perspective, the mining of new gold and the costly storage of existing gold for investment purposes are wasteful activities."
Mr Buiter compares gold with the stone money of the Isle of Yap in the Pacific Ocean. “This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite. Apparently, the total stock of Rai cannot be augmented any further. It also depreciates very slowly. This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world.”
Stone Rai coin: just as good as gold?
Mr Buiter is not calling a secular top in gold yet. “I don’t want to argue with a 6,000-year bubble. That bubble may well be good for another 6,000 years.”
Needless to say, the SNB is horrified by the referendum. “The initiative is dangerous. A ban on selling would very severely impair our manoeuvring room for monetary policy,” said Thomas Jordan, the bank’s president.
The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again. It might ultimately have to engage in money creation because it would have no revenue from bond holdings, the exact opposite of what the gold enthusiasts intend.
“In a worst case scenario, the assets side of the SNB’s balance sheet would, over time, be largely comprised of unsellable gold. Managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet; in practice by issuing the SNB’s own interest bearing debt certificates (SNB Bills). This would have serious financial consequences. The SNB could therefore find itself in a situation in which it could only finance its current expenses by means of money creation.”
These arguments border on Baroque but they sound plausible enough to laymen to chill Switzerland’s ardour for hard money. The latest poll shows the "No" side ahead at 47pc, to 38pc on the "Yes" side. Yet gold bugs are determined, and turnout is what matters.
The gold revivalist wave is a window into our age, an anthropological phenomenon. Establishments are fighting a rear-guard battle as well-organised campaigns force a change in policy. The Dutch central bank has repatriated 122 tonnes from New York. The Bundesbank is shipping its gold home to placate the “Bring Back Our Gold” movement and its allies in the Bundestag.
What it shows is a breakdown in trust. A system of custodial holdings that survived the First World War and even the Second World War – to a high degree – is unravelling. When it comes to foreign reserves, Europe’s states are becoming even more nationalist than they were in the 20th century.
For gold bugs it has been a stressful three years. The gold price peaked at $1,921 an ounce in September 2011 after a rising almost eightfold since the late 1990s.
It has since fallen to $1,194 as Fed tightening and the rising dollar entirely change the global financial landscape. Societe Generale expects it tumble a lot further, averaging $826 from 2016-2019.
For many gold enthusiasts it is an article of faith that QE would set off an inflationary spiral. Yet years have passed and much of the world is languishing in near deflationary conditions. Their economic models are clearly wrong, yet hardcore gold mysticism is a closed-belief system, almost religious in character, and therefore not falsifiable by facts. Advocates merely dig in deeper.
The refrain is now changing. Zero rates, QE and extreme debt may have deferred the day of reckoning – they warn – but the deluge will be all the worse when it finally comes. On that they may be right.
'Save Our Swiss Gold' referendum is a primordial scream against a world of quantitative easing but would paralyze the Swiss National bank
The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again Photo: Alamy By Ambrose Evans-Pritchard, International Business Editor
3:32PM GMT 27 Nov 2014
416 Comments Five million Swiss voters will decide on Sunday whether to force the Swiss National Bank to repatriate all its gold from vaults in Britain and Canada, boost its holdings of bullion to 20pc of foreign reserves and then keep the metal forever.
The “Save Our Swiss Gold” referendum is a valiant attempt by Switzerland’s army of gold bugs - and the populist Swiss People’s party (SVP) – to lead the world back to the halcyon days of the international Gold Standard. It is a primordial scream against a quantitative easing and money creation a l’outrance by the leading central banks.
Yet there is a snag. The Swiss National Bank (SNB) is the biggest printer of them all in relative terms, far outstripping the Bank of Japan, let alone the US Federal Reserve or the Bank of England – mere amateurs at this game.
The SNB has boosted its balance sheet to a colossal 83pc of GDP in a maniacal – but fully justified – effort to stop the Swiss franc appreciating beyond 1.20 to the euro, and to head off deflation. It vowed to print whatever is necessary to buy foreign bonds and defend the exchange rate. It has been true to its word since 2011.
At one stage it was mopping up half of the entire sovereign bond issuance of the eurozone each month, a scale of action that the European Central Bank’s Mario Draghi can only dream of. During the eurozone debt crisis, Standard & Poor’s even accused the SNB of becoming a conduit for capital flight, via Switzerland, to German, Dutch and French bonds, and therefore indirectly exacerbating Euroland's North-South rift.
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25 Nov 2014
You have to smile when you hear Swiss gold enthusiasts complaining that these foreign bonds – bought with electronic fiat francs created out of thin air – are now losing value as the euro slides against the dollar. But then we all suffer from congnitive dissonance.
The result of this buying blitz is that the SNB now has a balance sheet of 522bn francs (£345bn). Only 7.5pc of this is in gold, some 1,040 metric tonnes. It will have to buy 1,733 tonnes to reach the 20pc target mandate by 2019 if the vote passes.
Gold bulls are snorting. The world’s annual mine output is roughly 2,500 tonnes. We can all do the arithmetic. The SNB might persuade a friendly central bank to sell a few crates, but last year the central banks were net buyers. Led by Russia and other BRICS states, they bought 367 tonnes.
Citigroup’s Willem Buiter has poked fun at the Swiss plan, and at metal fetishism in general, in a lascerating report entitled Gold: a six thousand year-old bubble revisited.
“Making it illegal to ever sell any of the gold the central bank has now or acquires in the future would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. Its value is therefore zero.”
Mr Buiter says gold is a “fiat commodity” of almost no intrinsic value, coveted only as an asset “to the extent that enough people believe it has value as an asset”.
Personally, I find this a rarefied argument, bordering on Jesuitical, a subjective preference dressed as science. Nothing has intrinsic value beyond what we give it, including the things that Mr Buiter likes. But let us not quibble.
“Gold is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store. It has no significant remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses,” Mr Buiter adds.
“The cost and waste involved in getting the gold out of the ground only to but it back underground in secure vaults is considerable. Historically, gold was extracted from its ores by using mercury, a toxic heavy metal, much of which was released into the atmosphere."
"Today, cyanide is used instead. Cyanide spills (which occur regularly) can wipe out life in the affected bodies of water. Runoff from the mine or tailing piles can occur long after mining has ceased. From a social efficiency perspective, the mining of new gold and the costly storage of existing gold for investment purposes are wasteful activities."
Mr Buiter compares gold with the stone money of the Isle of Yap in the Pacific Ocean. “This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite. Apparently, the total stock of Rai cannot be augmented any further. It also depreciates very slowly. This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world.”
Stone Rai coin: just as good as gold?
Mr Buiter is not calling a secular top in gold yet. “I don’t want to argue with a 6,000-year bubble. That bubble may well be good for another 6,000 years.”
Needless to say, the SNB is horrified by the referendum. “The initiative is dangerous. A ban on selling would very severely impair our manoeuvring room for monetary policy,” said Thomas Jordan, the bank’s president.
The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again. It might ultimately have to engage in money creation because it would have no revenue from bond holdings, the exact opposite of what the gold enthusiasts intend.
“In a worst case scenario, the assets side of the SNB’s balance sheet would, over time, be largely comprised of unsellable gold. Managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet; in practice by issuing the SNB’s own interest bearing debt certificates (SNB Bills). This would have serious financial consequences. The SNB could therefore find itself in a situation in which it could only finance its current expenses by means of money creation.”
These arguments border on Baroque but they sound plausible enough to laymen to chill Switzerland’s ardour for hard money. The latest poll shows the "No" side ahead at 47pc, to 38pc on the "Yes" side. Yet gold bugs are determined, and turnout is what matters.
The gold revivalist wave is a window into our age, an anthropological phenomenon. Establishments are fighting a rear-guard battle as well-organised campaigns force a change in policy. The Dutch central bank has repatriated 122 tonnes from New York. The Bundesbank is shipping its gold home to placate the “Bring Back Our Gold” movement and its allies in the Bundestag.
What it shows is a breakdown in trust. A system of custodial holdings that survived the First World War and even the Second World War – to a high degree – is unravelling. When it comes to foreign reserves, Europe’s states are becoming even more nationalist than they were in the 20th century.
For gold bugs it has been a stressful three years. The gold price peaked at $1,921 an ounce in September 2011 after a rising almost eightfold since the late 1990s.
It has since fallen to $1,194 as Fed tightening and the rising dollar entirely change the global financial landscape. Societe Generale expects it tumble a lot further, averaging $826 from 2016-2019.
For many gold enthusiasts it is an article of faith that QE would set off an inflationary spiral. Yet years have passed and much of the world is languishing in near deflationary conditions. Their economic models are clearly wrong, yet hardcore gold mysticism is a closed-belief system, almost religious in character, and therefore not falsifiable by facts. Advocates merely dig in deeper.
The refrain is now changing. Zero rates, QE and extreme debt may have deferred the day of reckoning – they warn – but the deluge will be all the worse when it finally comes. On that they may be right.
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