A glittering referendum prize.

Switzerland's Gold Bug Moment

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Switzerland will hold a referendumat the end of the month on whether the nation's central bank should be obliged to hold at least 20 percent of its reserves in gold bullion. While there's something inherently attractive about a population having its say in how its assets are husbanded, the Swiss need to be mindful of the likely consequences of locking a fifth of their wealth away in a bullion vault.

QuickTake The Rise and Fall of Gold

Switzerland has about 522 billion francs of reserves. Less than 40 billion francs of that is in gold, with 462 billion francs in foreign currency. Measured in the Swiss currency, gold currently costs about 1,130 francs ($1171) per ounce. That's down more than a third from the high of 1,677 francs reached in October 2012, and near its lowest value in more than four and a half years:

During the past two decades, the top-to-bottom price range for gold measured in francs is 335 percent; European equities on that same basis have fluctuated in a 270 percent range, while 10-year German bund futures have low-to-high range of about 75 percent. Gold displays a heightened volatility during the past 20 years that's at odds with its historical status as a store of value.

As any economist of the Austrian school will tell you, a key ingredient of allocating a chunk of any nest-egg to the precious metal is to then ignore the daily, weekly, monthly or even annual price gyrations in the price. Gold bugs argue that the yellow stuff can't be debased by government infidelity the way a fiat currency can, or defaulted on like a debt security, or suffer from disruptive technology, management incompetence or fraudulent accounting of a company's equity.

That ability to remain indifferent to swings in the market, though, takes the kind of discipline rarely seen in public opinion. The U.K. government, for example, was roundly castigated for selling most of its gold reserves; the $3.5 billion it raised between 1999 and 2002 came right before gold tripled in value in the following decade. It seems unlikely that a drop in the price following the sale would have produced corresponding applause for the decision.

Both the Swiss government and its central bank oppose the referendum suggestion, arguing that it makes implementing monetary policy harder. Reserves are mostly there for a rainy day, which typically comes when a central bank needs to intervene in the currency market. With Switzerland doggedly defending its exports by preventing its currency from appreciating, holding euros and dollars is more useful than harder-to-liquidate bullion reserves.

Also, note that last year's slumping gold price cost the Swiss central bank 9.1 billion francs, obliterating the annual payment the institution makes to the country's regional cantons, as well as any dividend to the bank's shareholders. Voters might not be so keen on giving gold a 20 percent role in reserves if those regional disbursements keep getting canceled.

Maybe the Swiss, though, will prove less capricious, especially since they'll have made the decision themselves over the composition of the central bank's reserves. An Oct. 31 poll showed 47 percent opposing the gold purchase, 38 percent in favor with 15 percent still undecided.

If they do vote to enforce a 20 percent holding, though, the Swiss will have to live with the ensuing risk of higher volatility in the central bank's assets -- as well as a diminished ability to intervene in the currency market.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net