Swiss Muses New Gold Rules as Rout Continues

Switzerland gears up for a national referendum on November 30th that may raise demand for the metal even as its price continues to crater on lukewarm investor demand.

Switzerland gears up for a national referendum on November 30th that may raise demand for the metal even as its price continues to crater on lukewarm investor demand.

The Swiss National Bank opposes the “Save our Swiss gold” initiative, which proposes that the SNB be required to increase its gold holdings so that 20% of its assets are in physical gold. The SNB and Swiss government officials oppose the rule, which they say will make it harder for the bank to implement monetary policy and fight the deflationary pressures that have engulfed the Eurozone and that may bleed into the Swiss economy.

Currently, Switzerland has less than 10% of its 522 billion francs ($542 billion) in gold, meaning the SNB would be required by law to purchase over $54 billion of gold in the open market. If the law is passed, the sudden and artificial demand for gold could cause the metal to spike in price, as traders anticipate the Central Bank’s law-mandated orders.

Referendum Unlikely

Most economists and analysts agree that the referendum is unlikely to pass, which is partly why the law has not yet improved gold’s market price. Gold’s spot price fell 1.78% in trading Wednesday morning to less than $1148 per ounce.

Earlier this month, the metal fell below its $1200 resistance on declining interest in an inflation hedge due to greater deflationary pressures in Europe and disinflation in the U.S.

Supporters of the Swiss referendum argue that a greater gold holding will hedge the country against inflationary pressures that some believe could result from an aggressive expansion of the nation’s balance sheet due to accommodative policies that have caused the SNB’s balance sheet to rise by nearly a third since 2011. The Swiss Parliament and Swiss Federal Council have urged voters to vote no on the motion.

If the Swiss public disagrees and passes the law, it will still need to be approved by the Swiss Cantons. A majority of the cantons have said they oppose the motion. National polls show that only 44% of the Swiss public supports the notion, while 38% of respondents suggest the SNB should actually sell some of its gold holdings.

Miners’ Negative Returns

Proponents for the Swiss referendum argue that now is the perfect time to buy gold, because its price may have reached a bottom and is likely to rise. However, gold demand is driven by inflation expectations, and opponents of the referendum argue that decelerating global growth, deflation in the European Union, and moribund growth in emerging markets will keep inflation muted for several years, meaning that gold may not rebound for a long time.

Gold’s decline means that some gold miners are finding it more costly to extract gold, leading operations to yield negative margins for some in the industry. Some analysts fear that the metal’s low price could persist for several years, making it harder for mining companies to profit from operations.

Gold miner stocks have seen accelerating losses since the metal’s sliding price in September. The Market Vectors Gold Miners ETF has fallen over a third in the last two months.