(Kitco News) – 25 years after selling off more than half of its gold reserves, and even with the yellow metal trading at new all-time high prices, it’s time for the Swiss National Bank to start buying again, according to Peter Kuster, Editor of finews.com.
Twenty-five years ago, 15 central banks signed the Gold Agreement, opening the door for the Swiss National Bank's (SNB) gold sales, Kuster wrote in an analysis published Thursday. “At the time, many arguments were made against gold as an investment,” he said. “However, most of these assumptions have since been proven incorrect, prompting the need for a reassessment.”
Kuster pointed out that “a remarkable and noteworthy coincidence” took place today.
“This morning, Thomas Jordan will announce his final monetary policy decision as Chairman of the SNB Governing Board after more than a quarter century of service,” he said. “It is also exactly 25 years since 15 European central banks, including the SNB, signed the so-called Gold Agreement at the Bretton Woods Institutions' annual meeting.”
This agreement was designed to coordinate the gold sales of the central banks, with a collective decision to sell no more than 2,000 tons of bullion over the following five years. “Leading the sales program, the SNB sold 1,300 tons of gold between 2000 and 2005, more than half of its original 2,590-ton reserve,” Kuster noted.
The reason for this intense coordination was the central banks’ need to stabilize the gold market after word got out that multiple central banks were planning to sell reserves. “In May 1999, the UK announced plans to sell gold, causing its price to fall to a 20-year low,” he said. “Gold was seen as a relic of the past, with the world appearing peaceful, united, and stable after the end of the Cold War. Additionally, gold was seen as an unattractive investment compared to stocks, which pay dividends, or bonds, which pay coupons, since it does not generate income.”
The Swiss were in a unique position at the time. “At the end of the 1990s, Switzerland ranked fifth globally in gold reserves and led in per capita terms,” Kuster wrote. “The SNB was required to value gold on its balance sheet at a parity rate of 4,595 francs per kilogram, making the prospect of a revaluation gain during the transition to market-based pricing particularly appealing.”
The announcement from the SNB in March 1997 was a true game-changer in the precious metals world.
“On the advice of then-SNB President Hans Meyer (who did not consult the other two Governing Board members), [Swiss President Arnold] Koller proposed using the revaluation gains from the SNB's gold to fund the Solidarity Foundation—a move aimed at resolving the heated debate over dormant accounts and Switzerland’s role during World War II,” he said. “In June 1999, the SNB announced its gold sales program, signed the Gold Agreement that fall, and sold 1,300 tons of «surplus» gold between May 2000 and March 2005, though it was unclear what the proceeds (a total of 21,1 billion francs [$17 billion in 2025 dollars] at a price of 16,241 francs per kilogram) would be used for.”
The Swiss National Bank ultimately distributed one-third of the funds from the gold sales to the federal government and two-thirds to the cantons, which became the standard formula going forward. Then, between 2007 and 2009, the SNB sold another 250 tons of gold. “Unlike the first sale, the proceeds were not distributed but reinvested into foreign currency assets,” Kuster wrote. “The SNB justified this transaction by arguing that its gold holdings had become too large a portion of its foreign reserves.”
Swiss voters then rejected a November 2014 proposal that would have required the SNB to maintain at least 20 percent of its reserves in gold. “The initiative likely failed due to its poorly thought-out ‘non-sale clause,’ which would have severely restricted the SNB’s monetary policy flexibility,” he wrote.
Kuster said the SNB’s decision to sell off over 50% of its gold reserves “feels even more distant today than it actually is.”
“For years, central banks—especially those in emerging markets—have been buying gold,” he noted. “Gold prices continue to reach new highs, with a kilogram now costing more than 70,000 francs. And the notion of a peaceful and cooperative world focused on economic pragmatism is now a distant dream shared by only the most optimistic.”
Kuster said that gold’s outperformance of many other financial assets has been repeatedly validated. “In its 2023 annual report, the SNB noted that gold generated an average annual return of 4.3% in Swiss francs between 2009 and 2023, while its foreign currency investments (bonds and equities) earned only 0.4% over the same period,” he noted. “Even equities alone could barely outperform gold, with a 4.5% return since 2005, when the SNB first began investing in them.”
While it’s easy to criticize these gold sales in hindsight, Kuster said that “[t]he more interesting question is whether the SNB should reconsider gold purchases today, particularly given that its balance sheet has ballooned due to massive foreign currency purchases in the fight against a strong franc, while its gold reserves remain at 1,040 tons.”
Independent economist Adriel Jost addressed this issue recently, pointing out that “in its battle against the strong franc, the SNB appears to prefer buying bonds from countries with unsustainable debt (likely a reference to the U.S. and certain European countries) rather than gold,” Kuster noted. “Jost examines various arguments, including liquidity, but suggests the real reason for the SNB’s reluctance to buy gold is different. Gold purchases would signal a lack of confidence in other countries, and the SNB doesn’t want to upset its foreign central bank counterparts.”
“Let’s hope the Governing Board soon finds the courage for such independence,” Jost concludes.
Kuster said this kind of intellectual independence would also strengthen the SNB’s institutional independence.
“Foreign states might pressure Switzerland to hold their government bonds, as their refinancing costs could rise otherwise,” he said. “At home, the SNB’s investment policy has long been a target for political demands, particularly around sustainability. In September, the think tank Avenir Suisse called for the SNB to be required to invest broadly and neutrally in stocks and corporate bonds without excluding assets based on sustainability criteria or political concerns.”
Kuster pointed out that in his view, “Avenir Suisse overlooked the unique role of gold- a no-counterparty-risk asset with a relatively weak lobby and little vulnerability to political pressure (apart from the controversy over dormant accounts in the 1990s, when terms like «looted gold» were used).”
“It’s certainly worth debating whether the timing is right for the SNB to buy gold again,” Kuster wrote. “However, gold can be viewed as insurance against severe political and economic crises, as well as disruptions in the financial and monetary system. From this perspective, the gold price represents the premium for this insurance. When the premium is high, it simply reflects that the market does not consider the risk of a severe crisis to be negligible.”
“These should be compelling reasons for the SNB to reassess the gold question after a quarter-century,” Kuster concluded, “this time with the opposite intent.”
