On November 30, the Swiss electorate rejected the gold initiative 78% to 22% – every one of the 23 Swiss cantons rejected the proposal.
As a result, gold was up $50 an ounce yesterday due to short covering. Participants sold short because they knew the referendum would fail.
If it passed, it would have required the Swiss National Bank to hold 20% of its assets in gold, and it could no longer sell its current gold holdings. The referendum would have also required the bank to repatriate any gold held overseas back to Switzerland.
So what does this mean for both gold and Switzerland?
Gold Ripple Effect
The biggest winner here is clearly the Swiss National Bank. It can continue printing money as it wishes. And its balance sheet is now 83% of Switzerland’s GDP.
Central bank spokespersons have said in the past that the bank is prepared to buy an unlimited amount of dollars and sell enough Swiss francs to keep the currency weak compared to the euro. The Federal Reserve is happy to sell as many dollars as the Swiss want, of course.
The franc’s recent strength is solely due the slight possibility of being “as good as gold” again. But with the referendum decision, that strength has evaporated.
But what about gold itself?
After a knee-jerk reaction to the Swiss gold referendum, I would expect gold to continue along its current path.The precious metal’s recent weakness shows that a “No” vote was expected by marketplace participants.
But there’s a possibility of positive long-term trends for gold. There is a strong demand for gold in emerging economies, including those countries’ central banks. In fact, India recently removed the 80-20 import/export rule on gold. This regulation required that 20% of all imported gold into the country had to be re-exported as jewelry.
In the meantime, the 10% import duty on gold remains. This rule has served to make smuggling gold into the country more lucrative than smuggling drugs.
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Demand in China remains strong, too. As I pointed out a few months ago, most gold imports into China are underreported.Only Hong Kong reports its imports; however, new changes made by the Beijing government mean that most gold is now imported through Shanghai. Thus we can only guess at import numbers. The Shanghai Gold Exchange is the world’s largest platform for trading physical gold.
Playing Hard to Get
On the supply side, there’s been an interesting occurrence – repatriation of gold from the United States by European countries.
The Federal Reserve confirms that the biggest foreign withdrawal of gold held by the Fed in over 10 years occurred recently.
The Dutch led the latest repatriation move; they’ll bring home 122 tons (about $5-billion worth) of gold. Germany is still in the process of repatriating some of its 300 tons of gold held by the Fed. France is jumping on the bandwagon, too. The current front-runner for the presidency, Marine Le Pen, wants to discontinue gold sales and bring the gold home from the United States.
All the moves will restrict the amount of physical gold out there.
On top of that, the total gold supply is dropping. The third quarter of 2014 saw 7% less gold in the market than last year. Mine supplies were also down 2%, as the low price of gold is forcing mining companies to delay or eliminate work on gold mining projects.
And “the chase” continues,
P.S. Follow me on twitter@TimMaverickWSD!