A fascinating speech by SNB’s Jean-Pierre Danthine. The title of the speech is “Are central banks doing too much?”. To which he of course says no 9it is surprising to hear that he thinks we will be surprised to hear his answer as no).
Anyways, what interested me in the speech was this thing called “Save our Swiss Gold” referendum. Referendums have become fashionable but I read somewhere they decide everything in Swissland via referendums. It is as close to near people’s democracy as one can get. So what is this?
The initiative is calling for three things: first, the SNB should hold at least 20% of its assets in gold; second, it should no longer be allowed to sell any gold at any time; and third, all of its gold reserves should be stored in Switzerland.
Hmmm. The voting is to happen on 30 Nov. If yes, SNB shall back to quasi gold standard…
This worries SNB:
Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies. For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.
The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.
Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.
Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.
As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.
The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.
Hmm.. Basically the points people had towards gold standard apply here as well.
Will be really interesting to see how Swiss vote on this..