Gold and the Swiss Franc

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“Switzerland is to gold what Bordeaux is to wine”, Gilles Labarthe, Swiss journalist and ethnologist

What is the relationship between the Swiss franc and gold? Is there one? If there is one, is it just coincidence? I will try briefly with the help of some charts to show you why the Swiss franc is almost as good as gold but certainly it is not gold. The Swiss franc is considered today a safe haven as it was in the 70s after the gold exchange standard collapsed. As you know, under the gold exchange standard since its adoption in 1944, the US dollar was as good as gold but not gold since it was exchangeable into gold at a fixed rate. The end of the Bretton Woods Agreement put an end to it.

The sound management of Swiss public finances has the effect of the Swiss franc mimicking closely the price of gold. In 2011, to protect its exporting businesses, Switzerland decided to peg the Swiss franc to the euro, thus diminishing its attractiveness as an anti-inflation currency. Even though the peg was lifted in 2015, the Swiss National Bank still “intervenes” in the foreign exchange markets to stop the Swiss franc from moving up to far from the euro. The argument says that an expensive Swiss franc hurts Switzerland because the economy is heavily reliant on selling goods and services abroad and especially to the Euro Area. Swiss exports of goods and services are worth over 70% of GDP and the Euro Area is its largest trading partner. As you can see in the chart bellow the peg was not very effective. The Swiss franc continued its uptrend.

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With the existential crisis in the European Union over, the pressure on the Swiss franc is diminishing. It remains that the Swiss franc is with the Japanese yen considered today the “safe haven” fiat currency. They replaced the US dollar. With the US in chaos and the EU just out of its existential crisis the Swiss franc and gold are considered the major safe havens today with the Japanese yen.

Switzerland still has high gold official international reserves. For a small country, it has the 5th largest official gold reserves in the world after the Euro Area, US, China and Russia. For such a small country, it’s quite an achievement.

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With 1,040 tonnes of official gold reserves Switzerland stands in good position compared with developed and developing countries except for the Euro Area and US.

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Not long ago the Swiss franc was backed by gold and Switzerland had 2.5 times more gold (2590 Tonnes) than today. When it joined the IMF in 1992 it was forced to sell a large portion of its official gold reserves. As recently as 1999, Switzerland had over 40% gold backing for its Swiss franc requirement written in the constitution. After the collapse of the gold exchange standard, the Swiss franc was the only currency in the world that was still tied to gold. It was this unique attraction and guaranty of soundness that made the Swiss franc the focus of the envy of the proponents of the US dollar standard. The end of the Swiss franc’s historic tie to gold was brought about in 1992 when Switzerland joined the IMF. According to IMF Articles of Agreement (2b, paragraph IV) adherence to a gold-backed currency was prohibited. In 1997 the gold reserve requirement was reduced to 25%. Swiss gold reserves dropped from 2,590 tonnes to 1,040 tones. They are today at only 5.6% of official international reserves. Many Swiss consider this event a betrayal of the Swiss tradition. An attempt to bring back to 20% official gold reserves failed to pass in a referendum in 2015.

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Switzerland also has low debt and a constant current account surplus. It is and has been for a long time a country that lives within its means. Regularly the Swiss people through referendums defeat major public projects spending they consider to expensive. This has given the Swiss currency high trust even without the backing of gold. The Swiss franc is the closest fiat currencies get to sound money.

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Swiss gold reserves as percentage of GDP are very high. At 5.9% they are higher than the largest developed and developing countries.

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As a percentage of foreign exchange reserves Switzerland is also very well placed with 5.6% but far from the 40% it had in the 70s.

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The Swiss have a reputation for excellence in gold refining. That has let Switzerland to become the hub of gold refining, with nearly 70% of the world’s gold transiting through the country. Mining companies and gold recyclers export to Switzerland, where the gold is purified to the highest levels (.9999). It is then exported in the whole world to jewellers, investors or central banks. The best precious metals storage and safekeeping companies are also based in Switzerland.

Because of a sane management of public finances Switzerland has always been a low inflation country relative to the US and most of its European neighbours. However, to remain competitive Switzerland was forced to print currency and increase inflation as it did in the 70s but much less compared to other countries.

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Observe in the chart bellow that in periods of global financial crisis gold flows in large quantity into Switzerland but even after the crisis end gold remains in large part in Switzerland. There is a large quantity of gold stored in safes, vaults that is unaccounted in any publicly available statistics.

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I said it many times that the gold market is very opaque in general but especially in Switzerland and both official and private individuals do not like to talk about their gold holdings. Swiss discretion is famous.

No fiat currency escaped the devaluation against gold but the Swiss franc lost the least. A fiat currency has only trust, if not backed by gold, and certainly the Swiss have showed they are very financially conservative and manage public finances very well, under the vigilance of the treat of a referendum. So, of all the fiat currencies the Swiss franc has the most trust. It has build this trust through a very long period of good public management and political stability. That is why when there is a global crisis money runs into the Swiss franc and gold.

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The US dollar lost 3,334% versus gold since end of the gold exchange standard, the Gold Currency Index (20 largest countries by GDP including US) lost 10,434% versus gold and the US dollar lost versus the Swiss franc 351% since the end of the gold exchange standard in 1971.

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Observe in the chart bellow how close the Swiss franc correlates to gold since the collapse of the gold exchange system even if not perfectly.

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Since the Special Drawing Rights (SDR) was redefined as a basket of currencies in 1973, rather than approximately one gram of gold (0.888671 grams), the SDR lost 97% of its value in gold. The SDR is a basket of the major currencies so it is a good image of the fiat currency system. It is now an index composed of the US dollar, EU euro, British pound, Japanese yen and Chinese yuan.

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I do expect until a reset of the international monetary system that all fiat currencies go down versus gold but less for the Swiss franc as it has been the case since the end of the Bretton Woods Agreement in 1971.

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In the short term, the end of the European Union existential crisis and the beginning of political chaos in the US are both bullish for the euro and the Swiss franc versus the US dollar and it will take off pressure from the Swiss franc versus the euro. However, I do expect gold to outperform even in Swiss francs as we approach a reset of the international monetary system as it did since the collapse of the gold exchange standard in 1971 but less then in most of the other fiat currencies. Since the beginning of the year both gold and the Swiss franc have performed very well in US dollars and euros and I think they will continue to do so.

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“It is said that the Swiss only love money; this is not true. They also love gold.” Anonymous

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