Editorial: Swiss gold referendum ends with a whimper

One of the more bizarre political initiatives initiated by gold bugs went down in flames on Nov. 30, with 77% of Swiss voters rejecting a plan to force the Swiss National Bank (SNB) to buy 55 million oz. gold to keep in reserve.

The degree of the rejection was a surprise, as some earlier polling had showed support in the range of 50% for the initiative.

The referendum question was triggered by a petition signed by 100,000 Swiss and supported by the right-wing Swiss People’s Party, which had launched the “Save our Swiss Gold” campaign in response to the SNB buying up euros even as the European Central Bank (ECB) cranks up its quantitative easing program.

To protect Swiss exports, the SNB has vowed since 2011 not to let the euro go below 1.20 swiss francs, which left the SNB scrambling at times as the ECB systematically devalued the euro and kept interest rates low to stoke sluggish economies in several European Union-member countries.

Half of the SNB’s 522-billion-franc (US$533 billion) currency reserves are now held in euros, while 7.5% is held in gold — the world’s highest per capita level of central bank gold holdings.

If successful, the ballot measure would have forced the SNB to takes it gold holdings to 20% of its currency holdings, representing 1,700 tonnes on referendum day. That tonnage represents 57% of global gold mine supply and would be worth US$66 billion at today’s gold prices.

Usually one to shy away from political commentary, the SNB was adamantly and publicly against the petition, arguing that it would “severely constrain” its ability to fulfill its mandate to conduct its monetary policy geared towards ensuring price stability.

A second item under the petition was that the SNB would have be banned from selling its gold, and this prohibition would have been added to the Swiss Constitution.

The SNB shot back that “if, as the initiative demands, a ban on selling gold were to be enshrined in the constitution, the question would arise as to whether an immovable asset of this kind could even still fulfill the function of a currency reserve.”

With some exasperation the SNB explained that a secondary effect of this sales restriction would be that the profit distribution to the confederation and the cantons “would likely be lower” because, unlike foreign currency investments, gold does not generate income in the form of interest or dividends, and any valuation gains on gold could not be realized because of the sales ban.

The third component of the gold petition was that the SNB would have to repatriate any gold it held overseas. Of the 1,040 tonnes (33.4 million oz.) in the SNB’s gold hoard, more than 70% is stored in Switzerland, 20% is kept at the central bank of the United Kingdom, and the rest at the central bank of Canada.

The SNB commented that “decentralized storage in Switzerland and abroad is in line with the basic principles of due diligence in the conduct of business and business continuity management.”

The SNB said it was “pleased” with the referendum results, and that it “will continue to enforce the minimum exchange rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities to this end. The SNB will take further measures immediately, if required.”

That the Swiss electorate — which is one the most educated, wealthiest and small-government-oriented populations on the planet — would so unequivocally reject a pro-gold ballot initiative and support their conventional central bank leaders blows another big hole in the self image of the gold-bug community: that it sides with the surreptitiously overtaxed people against a tiny, internationalist government elite that is abusing its power by misusing fiat currencies.