Will the Swiss Referendum Turn Around Gold?

Gold is in free fall. But a Swiss vote later this month might help stoke a rebound in the yellow metal and alter the contours of the gold market for years to come.

Though it sounds farfetched, a referendum in Switzerland on Nov. 30 could force the hand of the Swiss National Bank to buy billions of dollars in gold and never sell.

So far, gold prices have paid little mind to the vote, slumping nearly 13% over the past three months as a rising dollar and diminishing inflation expectations have eroded gold’s appeal.

The SPDR Gold Shares (GLD) inched higher on Thursday from near a four-year low.

Yet Wall Street is gearing up for the possibility, albeit remote, that Swiss bankers might be forced to buy about $60 billion in gold over the next five years.

J.P. Morgan’s Nikolaos Panigirtzoglou, a strategist based in London, said on Thursday:

We feel that the market is overly complacent at a time where a major development could affect demand for gold in the coming months/years.
If passed, this could potentially require the Swiss National Bank to acquire a large amount of gold in the market – possibly $60bn worth of gold within five years if it decided to match the 20% threshold requirement by converting some of the cash holdings in its balance sheet.

At issue is an initiative called “Save Our Swiss Gold,” and it could force the Swiss central bank to hold at least one-fifth of its assets in bullion, up from about 8% now, report Nicholas Larkin and Catherine Bosley at Bloomberg.

Why push this issue? Proponents contend that the SNB’s policy of capping how many Swiss francs it holds brought too many euros onto the balance sheet, reports The Wall Street Journal’s Andrew Morse.

Sebastien Galy, a currencies analyst at Societe Generale, said in a research note last week that a “yes” vote would be a major support for gold:

The new gold rule would be the equivalent of giving a large put to the market. Each time gold collapses, the SNB would automatically buy gold so that the 20% reserves ratio is maintained, and this would presumably be achieved by mostly selling EUR and USD.

Jared Dillian, a former Lehman Brothers Holdings’ ETF trader turned market commenter, agrees.

If Switzerland buys $60 billion worth of gold over a period of 5 years…it is going to have a measurable impact on the price of gold. Will it go catapulting to new highs? Probably not. But if it looks like this referendum is going to pass, I wouldn’t be surprised to see gold creep towards 1400.

The Wall Street Journal’s Chiara Albanese and Ese Erheriene reported last month that normally sleepy currency options on the franc/euro are getting pricey, a sign that traders are already taking flyers on currency protection.

Investors have so far paid the vote little attention, but are now waking up to the risks. This mirrors traders’ last-minute anxiety over Scotland’s referendum over independence from the rest of the U.K. in September.

There are many caveats, and only a small chance thaWSJ’s Ms. Albanese and Ms. Erheriene report that Switzerland’s regions and parliament would still have to ratify the move, which sounds unlikely.
t the rule would ever come into effect. The

Source Url : http://blogs.barrons.com/focusonfunds/2014/11/06/will-the-swiss-referendum-turn-around-gold/