The Automatic Earth

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?