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Gold Would Get Boost From Surprise 'Yes' Swiss Vote; 'No' Vote Already Factored Into Prices

By Allen Sykora of Kitco News
Wednesday November 26, 2014 11:05 AM

(Kitco News) - All eyes will be on Switzerland this weekend as traders watch to see if the populace approves a referendum that would mean the central bank would have to ramp up its buying of gold buying over the next several years.

Photo courtesy of World Gold Coucil

As of now, the market expects the referendum to fail, based on polls. As a result, while a “no” vote could mean a dip in gold prices, traders and analysts also look for any weakness to be limited.

But if it were to pass, most say this could provide an impetus for gold to spike higher and also mean a higher base for prices in the future due to the increased central-bank buying that would be expected.

The “Save our Swiss gold” referendum would require all of the Swiss National Bank’s gold to be held within the country and forbid the future sale of central-bank gold. The provision capturing the most attention is one requiring at least 20% of the central bank’s assets to be held in the precious metal. Based on current reserves and gold prices, this would mean purchases of some 1,500 metric tons or more over a five-year period, analysts have calculated.

“Right now, the market is pricing in that it is not going to happen,” said Phil Flynn, senior market strategist with Price Futures Group. “The risk for gold is if they do surprise us and actually pass the referendum. I think that could give gold a really good spike.”

According to data compiled by the World Gold Council, Switzerland’s current official holdings of gold are 1,040 metric tons. This puts the country eighth on a list of central banks and the International Monetary Fund. The Swiss gold holdings account for around 7.8% of the central bank’s total official reserves, said Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital.  

“By our reckoning, a ‘yes’ vote would require SNB gold purchases on the order of 1,500 tons (or) 48 million ounces, most likely spread out over five years,” Nichols said. “That’s about 300 tons a year, an amount that could be fulfilled by the world gold market without any difficulty but would nevertheless provide considerable support to the price.”

Nichols later added: “A ‘no’ vote against raising Swiss gold reserves would likely have no lasting influence on the metal’s price, but a surprise ‘yes’ vote would likely prompt a short-term rally followed by a higher long-term average gold price.”

HSBC, in a research note this week, also estimated that passage would mean the SNB has to buy 1,500 tons of gold. This would be more than China’s record gold consumption in 2013. Further, this would be equal to roughly half of annual global mine output, HSBC said.

“This would reaffirm gold's status in the international financial system and boost gold market sentiment,” HSBC said, adding that this could prompt other central banks to consider stepping up purchases. “The impact of a ‘yes’ vote could quickly translate into prices and take gold as much as USD50/oz higher, we believe.”

Other banks have calculated that Switzerland would have to buy even more than 1,500 tons, although some of this hinges on the price of gold when calculations are made. However, Commerzbank pointed out earlier this month, it is difficult to determine the exact volume that would be required. For instance, the SNB would have to further increase gold purchases if it had to buy euros to defend the minimum exchange rate. But then, should the measure become law and gold prices rise, the value of the SNB’s gold holdings also would be higher and therefore mean the SNB has to buy less gold.

Commerzbank said passage of the referendum potentially could be a “turning point” for gold, which has been in a bear market for three years. To gauge just what might happen, analysts pointed to moves after other official purchases in recent years. When China announced in 2009 that it had increased its gold holdings by 454 tons over the previous six years, gold rose 6% in a month, Commerzbank said. When news broke later that year that India’s central bank had bought 200 tons of IMF gold, gold rose 15% in a month.

However, Commerzbank also cautioned, gold was in a bull market then. “On the other hand
the clearly more negative market sentiment (now) compared with 2009 points in the other direction,” the bank said.

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Other analysts also offered caution. Barclays said in an early-week research note that passage of the referendum would boost sentiment, but pointed out that implementation would likely take a while. Incremental demand might end up only replacing disinvestment elsewhere, Barclays said.

“We do not believe such buying would be sufficient to be a game changer for gold to offset the
headwinds from the macro environment in the form of a stronger dollar and higher interest
rates,” Barclays said. 

Polls show opposition to referendum in lead

The referendum was introduced by members of the Swiss People’s Party, claiming it would mean a stable Swiss franc. The SNB and Swiss Finance Ministry have been vocal opponents of the measure. For one thing, they argue that it would hinder the central bank’s ability to adapt monetary policy. It could also influence authorities’ ability to intervene in the foreign-exchange market to keep the currency from getting too strong and thereby hurting the domestic economy, with the SNB having set a euro/franc floor of 1.20 francs.

A poll a week ago by research institute gfs.bern showed that only 38% of participants supported the Swiss referendum. Forty-seven percent were opposed and 15% undecided. Another poll, by the newspaper 20 Minuten, also showed the measure does not appear to have majority support.

There is an old market axiom that traders tend to factor into prices what is expected to happen ahead of a major event, which is why some doubt failure will have a dramatic impact on gold. Flynn said that gold already blipped lower last week when the poll results were announced.

“Overall, if it’s a ‘no’ vote, on the opening of the market, it could push it down,” said Afshin Nabavi, head of trading with MKS (Switzerland) SA. “I don’t think it’s going to remain down there. But the immediate reaction will probably be a few dollars lower.”

Gold has rallied from a low for the year of just above $1,130 an ounce on Nov. 7 to recent highs just above $1,200 an ounce. This has led to speculation that anticipation of the Swiss vote has aided the gold bulls, meaning potential long-liquidation selling if it fails. However, HSBC said recent gains by gold probably are more due to increased emerging-market buying at lower prices than the referendum.

Rejection of the referendum would not be a surprise, HSBC said. The bank added that it could “deal a modest psychological blow to the market and help reaffirm the bear trend in prices, but is unlikely to send prices immediately visibly lower, in our view.”

HSBC said there are anecdotal reports that the “yes” camp is more energized and the “no” camp less visible. “This has led to speculation that the country could ‘sleepwalk’ into a ‘yes’ vote,” the bank said.

Analysts have pointed out there is another step necessary for the measure to become law; it must also be approved by the majority of the nation’s cantons. This means a “double majority” is needed, as Morgan Stanley strategist Joel Crane put it.

At one time, HSBC said, the Swiss franc was 100% backed by gold. However, in 1992, the country joined the International Monetary Fund, and member currencies cannot link their currencies to gold, HSBC explained. Since 2000, the SNB has sold about 60% of the country’s gold reserves, or about 1,500 tons, HSBC added.

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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