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Investing in Swiss Gold

Why You Must Own Gold Before December

Written by Geoffrey Pike
Posted October 31, 2014

On November 30, Swiss voters will have a chance to announce their displeasure with Big Government and money printing. They will have the opportunity to revisit their past.

A referendum will consider returning gold as an important piece of economic stability and a symbol of liberty, and it will specifically address three issues...

The first piece of the initiative states that the Swiss National Bank would not be allowed to sell any more physical gold holdings.

The second part would require that all of the country’s gold be held at home. Currently, about 20% is held with the Bank of England, and 10% is held with the Bank of Canada.

The third piece of the referendum, which I also believe is the most important, is that the Swiss National Bank would be required to increase its gold reserves to 20%. In other words, the Swiss franc would at least be partially backed by gold.

It is no surprise that the Swiss government and the central bank are strongly opposed to this initiative. If the Swiss National Bank had to obtain more gold every time it created new money out of thin air, then it would become very difficult to do so. This would essentially force the central bank to stop creating new money, or at least severely limit its ability to do so.

Before we get too excited at the prospect of this measure passing, it should be noted that this won’t automatically make it law. There would be additional hurdles.

But the simple fact that this vote is taking place and forcing a conversation on the subject is significant.

The History of the Swiss Franc

The Swiss franc was the last major currency to have a gold backing, which ended in 2000.

Before then, it had a 40% gold backing, which made it one of the best currencies to own. Even after the abandonment of gold backing, the Swiss franc continued to be strong compared to many other fiat currencies.

Perhaps the biggest disappointment — but also inevitable because of the lack of gold backing — came in 2011, when the Swiss National Bank announced it would put a ceiling on the franc. It took a play from the mercantilists of the world and decided it could not allow a strong currency.

So the Swiss central bank essentially pegged its currency to the euro, which meant printing more money, or its digital equivalent.

I don’t see this referendum as pro-gold so much as I see it as anti-government. Although a 20% gold backing is not a really high percentage, it is enough that it would at least slow down the Swiss National Bank, which would also probably slow down government growth and spending.

This vote, even if it doesn’t result in an immediate gold backing, is still quite symbolic. If a majority of Swiss voters cast a “yes” vote for the “Save our Gold” initiative, this will be a clear indication of their displeasure with Big Government and money printing, which often go hand-in-hand.

A “yes” vote would show that people do not trust the politicians and central bankers, as this referendum seeks to limit their power.

Investment Markets

If investors are correct, there is a possibility that this referendum in Switzerland might mean something.

Investment markets look to the future and price things accordingly. Futures prices can vary significantly based on expectations of events.

Since the Swiss franc was essentially pegged to the euro three years ago, the franc is somewhat predictable, at least in terms of the euro. The prices of options barely move due to low volatility and an expectation of low volatility.

But with the Swiss vote coming on November 30, currency options on the euro against the Swiss franc are more expensive for contracts expiring after the referendum. The near-term contracts that expire prior to November 30 are still trading at a low price. In other words, investors are betting on volatility, but only after the vote.

If the vote passes, I will become more bullish on the Swiss franc. Even if it isn’t passed into law anytime soon, I believe the vote itself would send a strong message to the central bank that the people are watching.

The central bank could possibly abandon the euro peg even without the 20% gold requirement in effect.

Of course, we hear as investors that you should buy on the rumor and sell on the news. If that is the case, we should probably be buying Swiss currency now. But you also face the possibility of the vote not passing.

We can be quite certain that the political elite are going to be firing up the propaganda quite heavily over the next few weeks. It will probably be similar to the political elite opposing the vote for secession in Scotland.

What About Gold?

I don’t see a downside for gold investors in all of this. The worst-case scenario is that the initiative doesn’t pass and things stay the way they are now.

If there is a majority “yes” vote, then this alone will call more attention to gold and its importance. If by some miracle the Swiss National Bank is forced to adopt these policies, then this will be really bullish for gold.

The Swiss central bank would have to buy about 1,500 tons of gold, or perhaps more, just to meet the 20% requirement. While Switzerland is a small country, this is still a significant enough amount of gold that it would move the market. More demand for gold means a higher dollar price for gold.

Also, if Switzerland has to request its gold back that is held abroad, it will be interesting to see if this request can be met quickly. We saw the same request from Germany, but that request was quickly withdrawn, probably as a result of strong nudging from U.S. officials.

We must also consider that if the Swiss franc is once again partially backed by gold, the Swiss National Bank will probably have to abandon its euro peg, which will mean a much stronger currency. This is good news for Swiss consumers, who will see cheaper consumer goods and services at home. However, it may be bad news for other fiat currencies.

We also can’t predict how other countries might react. Imagine if a country such as China decided to try something similar. I don’t envision this anytime soon, as the Chinese government relies too heavily on monetary manipulation right now. But if things get bad there and they were looking to compete with other parts of the world, you never know what might happen.

If a major country were to follow suit with Switzerland, then the demand for gold would explode.

There are a lot of variables here, but the vote on November 30 will be interesting to watch. If you want to own some Swiss currency through a brokerage account, there is an exchange-traded fund (NYSE: CHF) that makes it easy to buy.

And you can always buy gold, too, which will serve many purposes in your portfolio regardless of what happens at the end of November.

Until next time,

Geoffrey Pike for Wealth Daily

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