28 November 2014

With friends like these

On Sunday the Swiss vote on the "Save our Swiss Gold" initiative. If you solely consumed gold blogosphere content, you think this brilliant proposal still has a chance of succeeding. The reality is that the proposal:
  • is a wasted opportunity due to a stupid fatal flaw;
  • has little public awareness and is unlikely to pass.
While there is a high degree of awareness of the proposal within the professional and pumper segments of the gold market, it seems all those donations have been of little help, with Jordan Eliseo, Chief Economist at Australia Bullion Company, quoted by Reuters as saying that:
"I was actually in Switzerland a couple of weeks ago - and no one - outside of the gold traders I met with - had even heard of it - I asked waiters, bar men, taxi drivers and hotel clerks etc - even some old friends that I had a drink with when I was there - and literally not one had heard of it."
It seems mainstream Swiss attitudes towards gold have only weakened further since they voted to remove the link between the Swiss franc and gold in 1999. Given that political reality, you would think it would be wise to put forward a modest proposal that would provide as small a target as possible.
But no, goldbugs do not know such restraint and so it was with dismay when I read the proposal and its moronic ban on any gold sales by the Swiss National Bank (SNB). As many commentators and the SNB itself noted, this restriction in combination with the 20% minimum would "mean that gold eventually accounted for the bulk of the SNB's assets - it would be obliged to buy gold every time its balance sheet expanded and to sell euro every time it contracted."
If the drafters of the proposal had just required a 20% backing ratio, it would have a much better chance of being approved. A ratio requirement would have cut away a key argument against it (lack of monetary policy flexibility) and would have accorded with basic portfolio management, which is to choose an asset allocation and then constantly rebalance. Such a policy would have been a lot easier for the average voter to understand. Indeed, even within the pro camp there were concerns, with Zurich economics professor Hans Geiger saying that:
"the absolute ban on selling gold in future is doubly wrong." First says Geiger – who has long supported the initiative – the SNB should be able to reduce its gold reserves if its balance sheet shrinks overall. Secondly, "If Switzerland were to face crisis, it must be able to use the central bank's gold." 
Unfortunately for gold advocates, the pathetic insecurity of the goldbugs behind this proposal meant that they only wanted the SNB to buy buy buy and never ever ever sell. I was going to ask whether those behind the proposal themselves personally follow the investment strategy they expect the SNB to implement, but they probably do hold 100% of their investments in gold.
I have seen commentary arguing that the point of the proposal is to restrict the SNB, particularly in its 1.20 floor policy. However, as Barclays notes, "the gold initiative’s imposition of balance sheet costs would encourage the SNB to pursue “balance sheet light” policies like negative deposit rates instead". Probably not something the proposal proponents thought about, or would prefer.
In any case, even if it was the correct thing for the SNB to end up with 100% gold backing and that was the end objective, it was still politically naïve to go with the never sell requirement. Politics is about the art of what is achievable, about compromise. One is never going to move an electorate from one extreme to another in one step. Yet such nuance is beyond one-eyed goldbugs who feel oppressed and thus must have it all, now.
Keith Weiner, noting the Swiss banks' euro-denominated loans, concluded that the proposal would impose "a bitter dilemma on the Swiss people. They have a choice of slow losses by devaluation, or total losses by bankruptcy. They deserve a better option, a practical roadmap to the gold standard. It’s great that the Swiss people are striving to move towards gold. I am a passionate advocate of the gold standard, and I want to cheer for my Swiss friends. Yet I must caution them today. I realize they have spent a lot of money and political capital to come so far, but I don’t want to win this battle and lose the war."
Unfortunately I think that political capital has been wasted. When gold has friends like these, who needs conspiracies of price suppression.


  1. So Bron, you would be o.k. then with only a 20% reserve
    (ie 5 to 1 Counterfeiting Ratio)?
    Apparently it is too much to ask that anyone connected w/ the Mint to actually care about honest Money.
    Cheers, S. Rex

  2. I am not making any comment about correct ratios, it is an article about political stupidity. Being owned by government gives one an insight into how these things should be approached, and more goes on than you appreciate, but please continue on in your simplistic world.

  3. Thanks Bron once again for a bit of sanity. I am posting this after today's AM Fix ... no SGI bounce, so presumably not a large demand for the old Allocation At The Fix™.

  4. Yes the London Trader better get some allocations in on the fix before the vote, London may run out of physical.

  5. Spartacus Rex - BTW, better to have 20% than zero, no?

  6. Any comments from Alex Stanczyk on the gold traffic these days at all please? Appreciate any info!

  7. 20% Reserve is definitely an improvement over the present, however this presumes that CB's will ever be honest.

    In the U.S. the FRB was mandated to keep a 40% Gold reserve for demand deposits (2.5 to 1 counterfeiting ratio) and 30% Gold reserve for time deposits, and yet they still shipped tons of gold to the BOE in the 1920's to support the Pound Sterling and CBer's Pea in the Shell game thus causing the Market Collapse, Crash and Depression.

    Hocus, Pocus, POOF, And Its Gone!


    Cheers, S. Rex

  8. Bron - BTW, do you have any of these?

    Cheers, S. Rex

  9. Point taken about previous govt compliance with ratios.

    That coin I think is an exclusive, cant see it on our website.

  10. Before I read this article I thought the SGI had no chance - now I think it may have a much better chance.

    If people truly dont know much about this initiative then it seems that there is quite a bit of variability in the event. A voter without knowledge may look very positively at the SGI especially as it mentions bringing Swiss gold home - that doesnt sound bad at all to someone not informed about the issue.

    Personally, I dont think its as bad as you suggest b/c I dont think the Swiss bank will be cutting its balance sheet anytime soon (lol - when was the last time a major CB cut its balance sheet?)

  11. Hi Bron,

    This isn't the first time that goldbugs undermined their own case by insisting on terms that were political and/or economic poison. Back in 1982 Ron Paul and his ally Lewis E. Lehrman were members of the 1981-82 Gold Commission. They ensured that a return to the gold standard was a non-starter by insisting on Murray Rothbard's ill-conceived version of the gold standard as their preferred recommendation to the Reagan administration.

    They ended up issuing their own minority report and the rest of the commission went with the majority report authored by the monetarist chair of the commission Anna Schwartz. Schwartz and Milton Friedman wrote the influential book "A Monetary History of the United States, 1867–1960".


  12. Yes, the referendum was poorly designed. Most referenda are. But so what? The law frequently changes. I do not see the straightjacket of "no gold sales" as being a big deal. If developments make it sensible to eventually sell some gold, the Swiss can change their own law, and in a crisis situation they can do so quickly. To me the question is whether democracy should play any role at all. Banking interests answer that question with a resounding NO.

  13. Personally if I had been involved I would have narrowed the referendum to only repatriation.

    It would have been much easier to publicize and to argue.

    Small victories.

    If there is any irony, the same sort of overreach is going to act in the favor of gold as the central banks of the West also overreach.

    The problem of insular thinking cuts both ways.

  14. "A ratio requirement would have cut away a key argument against it (lack of monetary policy flexibility)..."

    Restricting "monetary policy flexibility" was exactly why the question was put on the ballot to begin with!

    Missed that?

    That was the entire point of the exercise but the establishment's propaganda barrage won the day, of course, as we had all expected.

  15. Kreditanstalt,

    No I didn't miss that, but you're missing the point that such an objective was overreach, as Jesse says, and thus it failed by a significant margin.