Saturday 10th December 2016

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Gold goes to a vote

Is the Swiss referendum a battle of monetary theories or competing faiths?

by Greg Klein

A Yes vote in Switzerland’s November 30 gold referendum should accomplish three goals—the country’s overseas bullion would come home, the Swiss National Bank would convert at least 20% of its assets to gold and the bank would be forbidden to sell any of it, ever. That’s all in the name of a stronger currency. The fact that citizens can vote on ideas now considered so radical has supporters delighted and opponents terrified. Not surprisingly, pre-plebiscite debate shows the two sides poles apart in a campaign with potentially international ramifications.

Is the Swiss referendum a battle of monetary theories or competing faiths?

That might explain why the Swiss National Bank made its case in English as well as German, French and Italian. To protect Swiss exports from an excessively strong domestic currency, the SNB buys and sells foreign exchange to keep its franc no higher than €1.20. The proposed changes, the bank argues, would destroy its flexibility to do so.

Gold supporters prefer bullion to the fiat euros the SNB has accumulated. The bank counters that it would lose potential profits from holding interest-bearing foreign bonds. Forced to raise money by issuing interest-paying debt, the SNB says it might have to print more money itself.

In a worst-case scenario, the central bank would be stuck with an increasing supply of “unsellable gold.”

Of course a 20% minimum wouldn’t turn the franc into a gold-backed currency. But there’s considerable creepage potential in the no-sale requirement. Any increase in the SNB’s overall assets would require a proportional increase in gold reserves. That proportion would increase beyond 20% when the overall assets decrease.

This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world. Another example would be pet rocks, as long as the rock in question is rare and costly to get into its final shape.—Willem Buiter, chief economist
for Citigroup Global Markets

And it would be worthless. So says one especially blistering polemic. “The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral,” writes Citigroup Global Markets chief economist Willem Buiter. “The gold becomes useless as a store of value of any kind. The gold has no consumption value to the central bank. Its value is therefore zero.”

He’s just warming up. Whether sellable or not, gold is intrinsically useless, he maintains. A fiat commodity vastly inferior to fiat currency, “gold is very close therefore to the stone money of the Isle of Yap.”

Buiter describes Yapese currency as “large doughnut-shaped, carved disks, consisting usually of calcite, that can be up to 4 m (12 ft.) in diameter, although most are much smaller.” A Wikipedia entry agrees, coincidentally in almost exactly the same words.

“This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world,” Buiter declares. “Another example would be pet rocks, as long as the rock in question is rare and costly to get into its final shape. Another is Bitcoin, a fiat virtual currency.”

He does offer gold bugs some encouragement, however. “Until the risk of serious inflation is removed from the medium-term outlook for the U.S., the UK and other fiat currencies, gold could be a relatively attractive store of value despite the cost of storing it.”

Furthermore, “if gold has positive, albeit wildly fluctuating value, it is because we are in a benign bubble for gold…. The gold bubble is, of course, pretty impressive. Intrinsically useless gold has positive value. It has had positive value for nigh-on 6,000 years. That must make it the longest-lasting bubble in human history.”

Deficit spending is a method for expropriation. Gold stands in the way of this insidious process. It should stand as a protector of property rights. If one understands this, there should be no difficulty understanding the hostility of the financial planners against a gold standard.—Lukas Reimann,
Swiss People’s Party MP

Even so, “that bubble may well be good for another 6,000 years,” Buiter concedes. “Its value may go from $1,200 per fine ounce to $1,500 or $5,000 for all I know. Investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride. Whether that is enough to impose it as a requirement on one’s central bank is another matter.”

Among those who wouldn’t be surprised by the intensity of Buiter’s remarks is Lukas Reimann. An MP for the Swiss People’s Party that triggered the referendum, he told Switzerland’s Federal Assembly, “Deficit spending is a method for expropriation. Gold stands in the way of this insidious process. It should stand as a protector of property rights. If one understands this, there should be no difficulty understanding the hostility of the financial planners against a gold standard.”

The SNB attributes 1,040 tonnes to Switzerland’s gold reserve. Various commentators estimate that to be somewhere between 7.5% and 8% of total SNB assets. A Yes vote would require the purchase of roughly 1,560 additional tonnes by the five-year deadline, assuming stability in the value of the SNB’s overall assets.

Last year’s global mine production came to 2,982 tonnes, according to Thomson Reuters GFMS. Scrap and implied net disinvestment brought 2013 supply to a total of 4,736 tonnes.

About five million people qualify to vote in a plebiscite that, unlike most of Switzerland’s many referenda, will be watched all over the world. Gold supporters need to win a majority of Switzerland’s 26 cantons, as well as a majority of votes cast.


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