With less than a week to go, the Swiss National Bank ( SNB ) is still not taking any chances and continues to make statements on what it see as the dangers to Swiss monetary policy from increased gold reserves in the form of a 20% gold minimum in the reserves, and a ban on gold sales if the initiative does go through.
The SNB governing board members are also having to contend with a Euro to Swiss Franc rate (EUR/CHF) which has now approached and arrived at the SNB’s Maginot Line, even as the gold and foreign exchange markets perceive that the ‘threat’ of the gold initiative may be about to subside.
While this may be true in the medium term, in a recent report, Commerzbank note that since the gold initiative rules allow the SNB a five year period in which to build its gold reserves towards a 20% level, then in the short term, the SNB can continue to pursue its EUR/CHF defence policy.
In the summer of 2012 there was further large scale interventions by the SNB where the Bank bought Euros and added about another CHF 150 billion to the SNB balance sheet (Some of these Euros are then converted into other major reserve asset currencies such as the US Dollar using a weighted target portfolio of currency reserves that the SNB adheres to).
Moving back towards a strong currency partially backed by gold might admittedly cause deflationary issues for Switzerland in the short run, but with other currency blocks globally apparently indicating that they are accumulating gold reserves in order to back their currencies with gold in the medium term, maybe Switzerland could lead the way for other Western economies by using gold in its monetary system in the way that it has historically done.
These approaches suggest that the SNB could transfer some of the SNB’s existing reserve assets to a Swiss sovereign wealth fund, thereby reducing the amount of reserve assets on the SNB’s balance sheet, the outcome of which would be that the existing gold reserves would then comprise a higher percentage of total reserve assets.
Using round trip gold swap transactions, where the SNB swaps currency for gold with counterparties on a temporary basis, Deutsche Bank suggests that the SNB could borrow gold just before balance sheet reporting dates, thereby making it look like the SNB had increased gold reserves, and then reverse the swap again after reporting day, returning the claim on the gold back to the lending counterparty.
But given that in the blurred world of central bank cooperation in gold trading and pooling, central banks are not even obliged to report the details of gold swap activity, surely Deutsche really means that it would be “politically more straightforward” since no one outside a handful of SNB and BIS gold traders, SNB executives, and BIS governors might even be aware that such a gold swap strategy was even being implemented? And with the Dutch central bank, De Nederlandsche Bank, having just announced the completion of the repatriation of 120 tonnes of its gold from the Federal Reserve Bank of New York back to Amsterdam, the Swiss electorate may now be wondering whether repatriation of their 300 tonnes of Swiss gold held abroad should now take on added urgency.