Prepare for Gold Rally If Swiss Bullion Referendum Passes

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Swiss Gold Vote a Central-Bank-Policy Threat as Yes Means Buying
The word "Switzerland" sits stamped on the side of a newly manufactured 400 ounce gold bar at a precious metal refinery near Mendrisio. A “Save Our Swiss Gold” victory means Switzerland would face buying the metal at prices that quadrupled since it began selling more than half its reserves in 2000. Photographer: Gianluca Colla/Bloomberg

There are people in Switzerland who resent that the country sold away much of its gold last decade. They may be a splinter group of Swiss politics, but they’re a persistent bunch.

And if they get their way in a referendum this month, these voters will make their presence known to gold traders around the world.

The proposal from the “Save Our Swiss Gold” proponents is simple: Force the central bank to build its bullion position up to at least 20 percent of total assets from 8 percent today. Holding 522 billion Swiss francs ($544 billion) of assets in its coffers, the Swiss National Bank would have to buy at least 1,500 tons of gold, costing about $56.3 billion at current prices, to get to the required threshold by 2019.

Those purchases, equal to about 7 percent of annual global demand, would trigger an 18 percent rally, giving a lift to gold bulls who’ve suffered 32 percent losses in the past two years, Bank of America Corp. estimates. With polls showing voters split before the Nov. 30 referendum, the SNB and national government are warning that such a move could undermine efforts to prevent the franc from surging against the euro and erode the bank’s annual dividend distribution to regional governments.

“It would have a major impact if it passes,” said Joni Teves, an analyst at UBS AG in London. “If they do launch a buying program, it would have effectively a constant bid in the market.”

Repatriate Bullion

A “yes” victory means Switzerland would face buying the metal at prices that quadrupled since it began selling more than half its reserves in 2000. The move would make the SNB the world’s third-biggest holder of gold. The initiative would also force the central bank to repatriate the 30 percent of its gold held abroad in the U.K. and Canada and bar it from ever selling bullion again.

With 1,040 metric tons, Switzerland is already the seventh-largest holder of gold by country, International Monetary Fund data show. According to UBS, a change in the law may force the SNB to buy about 1,500 tons, while ABN Amro Group NV and Societe Generale SA estimate the need at closer to 1,800 tons.

The SNB’s assets have expanded by more than a third in the past three years because of currency interventions to enforce a minimum exchange rate of 1.20 per euro. As of August, just under 8 percent of its assets were in gold, compared with a ratio of 15 percent for Germany’s Bundesbank.

Buying at least another 1,500 tons of gold would place the Swiss central bank behind only the U.S. and Germany, and just above Italy’s 2,451.8 tons, IMF data show.

Biggest Reserves

On a five-year deadline, that’s 300 tons a year, roughly the average amount investors accumulated annually through exchange-traded products from 2003 through 2012. Global gold demand totaled 4,065.5 tons in 2013, the London-based World Gold Council estimates.

A “yes” vote may push gold above $1,350 an ounce, or 18 percent more than now, said Bank of America analyst Michael Widmer. Approval, although unlikely in Widmer’s view, would create a “firm” support at $1,200 because the SNB would need to buy about 1,500 tons, he said. Widmer forecasts gold will average $1,150 in the second quarter, rising to $1,225 for the whole year.

The initiative was started by several members of the Swiss People’s Party who argue it will preserve national wealth and enhance, rather than diminish, the central bank’s ability to act. They argue the SNB was wrong to sell more than 1,500 tons between 2000 and 2008.

“They can print money from noon until night,” said Luzi Stamm, one of the initiators. “But if they do, they’ll have to hold a portion as bullion.”

Balance Sheet

Gold fell the most in more than three decades last year and is now 41 percent below its September 2011 record. The metal, trading near a four-year low, was at $1,141.93 an ounce today. Investors trimmed their holdings of gold-backed funds to a five-year low this week.

Swiss buying would help replace lost consumption in recent years from ETP hoarding and because mining companies have mostly closed out hedges, a process that had added demand, Barclays Plc estimates.

Last year’s 28 percent gold price drop dealt a blow to the SNB’s balance sheet, prompting the century-old institution to scrap its dividend. Its governing board members have warned that passing the initiative would jeopardize their annual profit distribution to cantonal governments, which rely on the SNB’s payment to fund public services.

SNB Governing Board Member Fritz Zurbruegg said last month that the proposal would “seriously impair our ability to fulfill our legal mandate.” He points out that per capita, Switzerland already has the world’s highest gold reserves.

Short-Term Rally

A “yes” vote “could maybe rally gold in the short term,” said Robin Bhar, an analyst at Societe Generale in London. “Does it turn gold into a bull market and do we see new peaks? I doubt it.”

The SNB buying gold at a time when other nations are also accumulating would signal a reversal of selling that spurred an agreement starting in 1999 between European central banks to cap disposals. The accord, designed to reduce market disruption, was renewed this year without any limit.

The World Gold Council declined to comment on the pending initiative.

In repatriating its gold, the SNB wouldn’t be alone. Venezuela took back some gold in 2011 and 2012 and the Bundesbank brought some back last year, part of a plan to store half of Germany’s gold in domestic vaults by 2020.

According to the Swiss government, the initiative’s ban on gold sales would deprive the SNB of an asset should it find itself in dire straits. Several analysts share that view.

“You hold gold in terms of an emergency that you can liquidate if you really need to,” said Georgette Boele, an analyst at ABN Amro in Amsterdam. She sees gold averaging $925 next year, which would be the lowest since 2008. “It’s an interesting vote, let me put it that way.”

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