- is a wasted opportunity due to a stupid fatal flaw;
- has little public awareness and is unlikely to pass.
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:
"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.