Nov 302014
 November 30, 2014  Posted by at 11:23 pm Finance Tagged with: , , , , , ,

Wyland Stanley Chalmers touring car 1922

Amusing, that Swiss vote today. Or rather, the three votes. I can’t oversee why the first one, the hike in taxes for foreigners, was rejected. It would seem reasonable that everyone living in a country pays a similar amounts in taxes, but perhaps there’s another angle to the topic that I haven’t read about.

The second vote, the one on immigration limits, initiated by an eco group, looks easier to understand. In a country smack in the middle of continental Europe, which has 3 official languages and where 25% of the population are foreigners, forcing the government to limit immigration by 80% from one day to the next, from 80,000 to 16,000 people, seems to be quite simply too steep a demand.

If they would have formulated the question better, more subtle perhaps, more gradual, and chances are the initiative wouldn’t have been turned down by 74% of voters. This takes place against the background of a Europe that is being flooded with immigrants from all sides, where everyone has a hard time coming up with the right answer(s), and where the whole issue drowns in a vapor of right wing extremism. It makes sense to tread more carefully in circumstances such as that.

And in the third question, the most publicized one, about the Swiss central bank (SNB)’s gold holdings, I think something exactly like that happened. The question was poorly formulated. And communicated. The gold question itself consisted of three parts again. First, repatriating of Swiss gold stored abroad. A hot topic in many countries these days.

Second, a ban on the central bank selling any gold, ever, in perpetuity. And third, an obligation for the central bank to purchase, at today’s prices, 60-70 billion Swiss francs (about on par with the USD) worth of gold, 1500 metric tons, in five years, to have 20% of its reserves in gold.

If the question would have been only about repatriating the gold Switzerland already owns, I don’t see how it could not have been accepted. Part 2, the ban on selling until the end of time, looks once more poorly phrased. How is anyone supposed to know what that entails, ‘forever’? If you’re forced to sit on the stuff until the day you die, and your kids too, what use is it? People may have all sorts of answers to that, but it’s what the Swiss (wo)man in the street was supposed to answer today. Surely, there would have been a better way to put the question.

The biggest question was number three: buying $12-14 billion in gold every year for 5 years. From what I understand, the central bank warned about that quite strongly. And I see people calling that anti-gold propaganda, but I think there’s more to it than that. Not that these issues are ever simple. For one thing, the Swiss central bank used to have, on a regular basis, 40% of its reserves in gold until as recently as 10 years ago.

But. Things have changed over the past decade. For central banks everywhere, just look at the Fed balance sheet that exploded 5-6 fold to $4.5 trillion or so. The Swiss isolate themselves from all manner of things -and then yodel about it -, but their central bank has had to keep up with global developments, at least to an extent.

And I don’t want to pass any sort of judgment on what part of its reserves any central bank should hold in gold, but to force it into buying specific amounts while it’s trying to keep the value of the franc from exploding to infinity and beyond is, in my view, one more poorly phrased proposal.

The SNB has spent about the same amount the ‘Gold Initiative’ wanted it to spent on gold purchases, on buying euros, in an effort to keep the franc down. And we can all think about that what we want, but that’s not what the vote today was about. The SNB’s problem with that vote was that it would have forced it to let go of that ‘anti-euro’ stance. Betting everything on gold, and letting the franc surge through the roof against the currency all your neighbors use, that’s quite a dramatic reversal, no matter how you look at it.

The entire discussion, predictably, got swayed in the direction of, and taken over by, the ever present gold bugs, but with gold having dropped from $1920 a few years ago to $1167.15 today, their view obviously is not the only one that counts. Because Switzerland, as far as we know, might run into very serious economic issues if it allows the franc to rise substantially against the euro.

Plus, neither the country nor its central bank may be quite as powerful and wealthy any more as we like to think. So perhaps the question shouldn’t have been one with strict demands for purchases of gold, but one that questions the policy of buying tens of billions in euros, a policy that has lost the SNB a lot of money already now the euro is down 10-15% against the US dollar.

You can’t, if you’re Swiss, separate the two: you can’t vote on gold but not on the Swiss france vs the euro. So the question asked was the wrong one. And you can’t try and force a central bank to buy gold and hold it into perpetuity, into infinity and beyond, without addressing the problems Swiss companies would encounter if and when the franc would soar against the euro.

And the euro is sure to lose more ground vs the US dollar. So should the SNB have bought dollars instead of euros? The bank itself would have had more wealth, but the euro would have sunk further too, killing Swiss exports to its neighbors, so it’s mixed blessings all around. Note that if the initiative had been accepted, the SNB would have had – in all likelihood – to sell euros to purchase gold, thereby exacerbating everybody’s problems.

From where I’m sitting, I have the impression that the entire thing got moved way out of sync because gold is such an emotional issue for many in the economics press, and especially the blogosphere (where selling gold is very popular). Whereas the real issue, and the reason 78% of Swiss said No, was that the ‘initiatives’ were all poorly phrased. Get yourselves some hip spin doctors already!

Aside from that, there’s of course also my personal opinion that gold is not the cure-all end-all answer to every question or problem. But I know that’s often taken for some kind of heresy. Still, what we’ve always said at The Automatic Earth still stands: owning some gold is fine, but only after you’ve taken care of basic essentials; it may take years for gold to get back to its ‘historically just’ level. And most people don’t have that kind of time.

And let’s be honest, how many people really have their basic essentials down? I know that saying that will lose me readers, but I just don’t want to be part of some church. If we’re going to have a discussion, let’s at least agree to leave no stone unturned.

And yes, we can now expect increased downward pressure on gold. Maybe not as much as on oil, but still. But I don’t think that has anything to do with the value of gold, just with propped up expectations. If oil can drop 40%, what’s gold going to do?

Home Forums If Oil Can Drop 40%, What’s Gold Going To Do?

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    Wyland Stanley Chalmers touring car 1922 Amusing, that Swiss vote today. Or rather, the three votes. I can’t oversee why the first one, the hike in ta
    [See the full post at: If Oil Can Drop 40%, What’s Gold Going To Do?]


    Ilargi, i appreciate the fact that you express your opinions sincerely and not just to be part of the ‘crowd’….thats why i check this blog on a daily basis, and i will be donating too! (Its taken longer than i would have hoped due to personal circumstances).

    Also, i’m absolutely sure someone (indeed probably more than one person) has read this blog over the years and didnt heed your caution over Gold. They must be regretting that, what with Gold sinking the last couple of years!

    Anyway, just wanted to thank you for your work!


    Having just re-read what i wrote, i just want to clarify that i am not anti-Gold, and from reading TAE over the last year or so, i dont think TAE is either. I just think theres so much manipulation in the markets today, and so much motivation to make the system seem healthy, that Gold-bugs are really being naive idealists.


    Koso, thanks for the kind words. All I am vis a vis gold is neutral, certainly not against it. But it’s become a true religion. with all the non-thinking and zero tolerance that comes with it. So many places on the web try to sell you the stuff. In 10 years or 20 years gold may be great to have, but we have to live through those years first. And sure, the USD will fail at some point, but who would doubt the euro will go first? And how long is that going to take?


    Agree 100%. By the way, are you based in the UK? cos i just noticed the time of the posts are based on GMT.

    John Day

    If Oil Can Drop 40%, What’s Texas Farmland Going to Do?
    That’s a question I’m actually a bit MORE interested in seeing answered in the next few years.


    Ilargi, I have a question about this sentence in your post: “And sure, the USD will fail at some point, but who would doubt the euro will go first?” Here I guess it depends on what you mean by the Euro failing. When I imagine failure of the dollar, I imagine holders of dollars wanting to see their dollars to buy something else, perhaps gold, perhaps another currency, perhaps an operating business, perhaps land … you get the idea. And what would trigger that? Because virtually everything on the Fed’s balance sheet are dollar denominated financial assets.

    But when discussions come up about the “failure” of the Euro, the topic tends to focus on the breakup of the Euro zone. The focus is more on the politics, rather than holders of Euros losing faith in the value of their Euros and wanting to hold something else instead. I think it is altogether possible, if not likely, that a political crisis could actually cause the Euro to strengthen. If Greece leaves the Eurozone, for example, what do you think Greeks and Greek banks would prefer to hold, Euros or the new Drachma?

    Take one look at the ECB balance sheet and you see that gold makes up more than 50%. For the Fed the amount is miniscule.

    So I think the eventual crisis for the dollar and the eventual crisis for the Euro are going to be completely different in character, and a political failure of the Euro might actually enhance its strength as a currency.


    I agree that they can push the gold price around all they want, except that pretty soon they are going to run out. The numbers for physical gold flooding into Asia is astounding (and that is going to private individual sales so it’s not like the central banks over there could use that gold to continue the shenanigans). I’m surprised it’s lasted as long as it has. Based on how much gold the western central banks purportedly held, the end seems to be nigh… This could be why they are now beginning to crash the system.


    I don’t think it will take 10 or 20 years for gold to reach its new value threshold. The paper price suppression game can’t go on indefinitely. The lower the price the faster it’s being hoovered up. Supply and demand dynamics will kick in when the physical supply is no longer available. Like Mark_BC I think we are seeing last ditch suppression efforts before the system craters. The metals will continue to be crushed until its over. What’s on the other side is anybody’s guess!


    I wouldn’t assume that the referenda are “poorly worded”. Referenda, like bills in Parliament, can be written to encourage passage or to guarantee failure. It depends on who’s doing the writing. Deceptively “positive” referenda, written by disguised opponents of the proposal, are common.

    Golden Oxen

    Gold’s detractors always discuss gold’s recent highs when venting their hatred of Real Money.

    Never do I hear them say Gold is up from 300 a decade ago and just had a vicious correction. 20 dollars when the Fed was created.

    Most Gold detractors are Leftists as well. They cannot understand an asset of wealth preservation, a stable family jewel item that is NEVER TO BE SOLD or pawned unless of dire emergency. Spending, loans, credit cards, dying poor so they may enter heaven is their thing.

    Leftists, credit, fiat money, debt, gold hating, wealth hating, they are all peas in a pod.

    “The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register.”

    Hans F. Sennholz



    Yes, the euro demise is different from that of the dollar, if only because it can take on lots of different shapes. My point is more that the USD is the strongest currency in the world right now, because of all the global debt denominated in it.

    If one country were to leave the euro, the ensuing uncertainty would not boost the euro, but make it futile.

    As for “I imagine holders of dollars wanting to see their dollars to buy something else, perhaps gold, perhaps another currency, perhaps an operating business, perhaps land …”. I would say: what holders, what dollars? That 11% plunge in US holiday sales is a big red warning sign, and we’re just getting started in the post QE world.



    I’m in Holland right now, don’t know for how long, after 20 years or so in North America and 4 years travelling with Nicole on her speaking tours. Don’t think there’s a place that I can call home anymore. Certainly not Holland, though I was born there and still carry the passport. The time setting is a fluke, and I don’t care enough to do anything about it. My computer is still set to Eastern time.


    It’s exactly that dire emergency we’re talking about here, GO. And being labeled a leftist, a detractor and a hater makes me smile. It makes no difference how many times I say I have nothing against gold, if you’re not with us, you’re against us. And that smacks too much of a religion for me. As for that timeline, that fits in well with the million and one websites popping up that sell and promote gold. And that makes me think too much of snakeoil.


    @ GO,

    “Most Gold detractors are Leftists as well. They cannot understand an asset of wealth preservation, a stable family jewel item that is NEVER TO BE SOLD or pawned unless of dire emergency.”

    I think the sage wisdom of Mike Tyson can be referenced here…

    “Everyone has a plan ’till they get punched in the mouth.”

    I suspect those “dire emergencies” will be much more prevalent in the future than people expect…


    Golden Oxen

    “It makes no difference how many times I say I have nothing against gold, if you’re not with us, you’re against us.”

    Then how about discussing the purchasing power of the dollar versus gold for the past century.

    How about discussing what the 95 percent drop in your favored fiat currency has done to the poor and the elderly on fixed incomes.

    How about discussing the defenders of the value of your favored fiat handing over a couple of trillion of them to their bankster friends.

    How about bad mouthing stocks, real estate, art, diamonds, with the vehemence you show constantly against gold.

    You most certainly do have a special place in you heart for gold Ilargi.

    The sad thing is that many people who agree with you about our bleak financial future are trying to escape this Bankster’s wet dream of a financial system,words you used to aptly describe it, by buying gold and you lambast them and gold.

    How about beating up on the shit heads that are buying Amazon and Facebook at these prices, or paying 60 million for a photo of Marlon Brando, and giving the folks who are trying to hide from the madness in a conservative manner a fair shake?


    “Most Gold detractors are Leftists as well.”

    That seems to be the case, but I am left of centre and a huge believer in gold. There are a few left leaning gold commentators out there.


    GO – I think Ilargi has given gold holders a fair shake. He maybe doesn’t talk about diamonds or art work (although a lot of elite have been parking their ill-gotten gains there), but, let’s face it, how many common folk are out buying diamonds and art work like they are gold? Many, many were sucked in at 15, 16, 17, $1,800.00, just like copper, oil, wheat, aluminum, natural gas, etc. There was a lot of speculation (a lot!) in these commodities, and China was using them over and over again as collateral in order to gain loans.

    Ilargi is not saying gold is done. He’s saying it will see its day again, but just not now. We’re not controlling the levers here; they are. They “deliberately” pumped up the froth, and now it’s coming off. How many guys who bought $15,000.00 worth of gold at $1,500.00/oz. (maybe borrowed to do it) are going to keep holding it? Not many. If it doesn’t make them money, and they’re actually losing money, they’re going to unload it into the market. You may have bought gold to protect yourself, but many didn’t do it for that reason. They did it purely on speculation, to realize a short-term gain, because all you heard out there for awhile was that gold was going to $5,000.00/oz. – for sure!

    Not allowing the 2008 crash to happen, pumping trillions out with QE, resulted in gross speculation, carry trades, etc. The smart ones (ha!) who were pulling the levers sucked everyone into the fun, and of course they’re long gone and out of the speculative trades when they pull the lever to the downside.

    If this all falls apart, there needs to be some serious investigation and some jail cells.


    Ilargi, I mean the bondholders, not us small fish little people. And I disagree with you about the Euro. The Euro will remain a strong currency as long as Germany is a part of it.

    Golden Oxen, I just don’t see the so-called Leftists you speak of as having much interest in the debate. The opposition to gold comes from banking interests and is thoroughly mainstream in the West. And as long as gold is priced through the futures market it is and will remain just another a financial asset under the thumb of the bankers. But gold will be by far the best asset to own if an when the system really breaks. When could that happen? On one hand it could happen any day. On the other hand, in this day and age of central bank coordination, it could be a long time. Your reassurances that gold has performed well over the last 10 years will be small comfort to those who bought two years ago.

    Diogenes Shrugged

    A year ago (11-30-2013) after an article posted at ZeroHedge, a commenter calling himself Buckaroo Banzai wrote this:

    “It’s called ‘Free Banking,” and it existed in Scotland for a few hundred years, until the English identified it as a threat and crushed it.

    “It’s a system that works, but it isn’t clear how well it would suit an electronic economy, like the one we have today. BitCoin is an outstanding choice for Internet transactions.

    “Gold and silver coins, free banking, and Internet crypto-currencies: these are not mutually exclusive ideas! They can all work side by side.

    “It is sad that I have to explain this. It just goes to show how completely foreign the idea of a truly free financial marketplace is in this day and age. 100 years of financial tyranny has mentally disabled the population so badly that even in a forum like ZeroHedge, the idea that multiple systems of currency and finance can freely coexist, with each serving its own purpose, seems barely comprehensible.” (End quote)

    I’ve always maintained that the value of gold will never go to zero, and thus represents a form of money that can be considered a durable store of value. But when that value is measured in dollars, it can be expected to fluctuate, even wildly.

    In Ilargi’s defense, I believe his observations on gold have consistently been the result of analysis rather than advocacy. Always remember that investment advice is too often given by those intending to take the other side of the trade from you. Ilargi is not giving advice, but is rather making observations at arm’s length.

    I’m sure many of you have noticed that Martin Armstrong has also been relatively bearish toward gold for quite some time now. He sees $650 gold being an actual possibility.

    Gold – One More Pop or Collapse?

    Finally, congratulations to Ilargi for being recognized as a guest Tyler (ZH) so many times recently, as well as for being increasingly re-posted at other truth-seeking aggregator sites. The growing publicity is many years overdue.


    Thanks Diogenes,

    Yeah, and Reagan’s former budget director David Stockman actually had Lee Adler ask if I would join his Contra Club. As for the gold ‘discussion’, I don’t see that going anywhere. And you’re right, I just watch developments.

    Golden Oxen

    Mr. Stockman is very bullish on Gold.

    His Contra Club is a great site, wealth of top shelf financial information.

    Free subscription and daily e-mails of current analysis on recent financial matters.


    As a store of value, the Dollar has been failing for decades.

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