The Six Major Fundamental Factors that Determine Gold and Silver Prices

For us, gold  and silver are the most complicated assets to price. Stocks, currencies and other commodities mostly depend on fundamental data of the stock, the country or on physical demand and supply of the commodity. Once fundamental data about the asset comes out, even an inexperienced investor can understand most price movements.

Pricing gold or silver on a fundamental basis is far more difficult because prices depend on the valuation of other assets and on differences between U.S. data and the rest of the world. We think that gold and silver are valued somehow “indirectly”, it is a relative valuation and describe a “delta” between the US and the rest of the world. This makes trends driven by fundamentals very difficult to understand. Maybe therefore, gold and silver are far more subject to “love it or hate it”.

Many analysts base their arguments to buy or sell gold on a limited set of fundamentals or only on technicals. Many gold bulls based their analysis mostly on the explosion of public debt and/or on real interest rates. Since these bulls do not get the fundamentals right. In 2013/2014 they got caught on the wrong foot and consequently they speak about conspiracy theories and market manipulation when the gold price falls. Many opponents, however, argue that gold brings no income, but has only a cost of carry. We will see that this opinion is also ingenious because in certain periods, gold prices increase far more quickly than the total return on stocks or bonds including dividends and coupons. For us:


Gold and silver prices express the strength of global (non-U.S.) economy versus the expectations of real interest rates in the United States

To grasp this sentence more easily we determined six major fundamental drivers for gold and silver:

  1. Price movements of other commodities in combination with global demand for these commodities, an “indirect pricing” of production costs.
  2. Global and in particular U.S. inflation, often driven by rising money supply
  3. Trade imbalances and U.S. debt and the U.S. twin deficits, that might culminate in a “fear factor”.
  4. Central banks’ activities like money printing or gold purchases and sales.
  5. Real interest rates and in particular the ones in the U.S.: interest rates compared to inflation and wages
  6. Private physical demand and supply.

Technical support and resistance levels might be more important for gold and silver than for other assets because fundamentals are difficult to understand.

1) Gold and silver move with other commodity prices and global growth

Gold and silver are correlated to other commodity prices. In particular the global Brent oil benchmark and copper, in the last years a proxy for Chinese investments, are closely linked.


gold copper zinc price compared

Gold, copper, zinc prices compared (source)


Recent developments (2013/2014):

Higher supply of U.S. oil and slower global growth weakened oil prices and consequently gold prices. Both copper and oil got under pressure by the slowing of Chinese real estate investments. High Chinese interest rates (see also the next point) and the regulation of Chinese housing, where the law disallows to buy a second home, helped to calm these investments.

2) Gold and silver prices are correlated to global money supply and inflation.

Metals appreciated until 2011 with rising money supply and inflation in emerging markets:

Global M2 and gold price 1998-2012

Due to the high portion of food and energy in these countries’ CPI baskets, the effect of rising commodity prices on inflation is stronger than in developed nations. Since summer 2011, but also between spring 2008 and autumn 2008, global inflation figures fell and consequently also gold and silver prices. The following chart shows the relationship with the yearly change of U.S. CPI inflation.

Gold and Inflation Rate

Gold versus US YoY CPI rate until summer 2011 (source)

These charts, however, show two measures of the CPI-adjusted gold price:

Gold price deflated by increase US CPI Gold price divided by absolute value US CPI

The common view that the gold price is related to U.S. inflation is difficult to sustain in a world where emerging markets soon achieve half of global GDP. During the end 1970s “gold bubble”, however, U.S. inflation was the main driver of high gold prices (see more under point 5).


Recent developments (2013/2014):

Tight Chinese monetary policy with Central Bank lending rates of 6%  limited investments, while the end of U.S. tapering also indicated tight monetary policy, limited inflows into Emerging Markets (EM) and available money in these former drivers of global growth. Falling food and energy prices in Europe are an indicator of weak EM.

3) Gold and silver prices appreciate with trade and growth “im-balances” against the United States: the “fear factor”

Gold and silver typically rise together with economic improvements in emerging markets and (historically) Europe when the U.S. cannot cope with this pace. This imbalance leads to a “fear factor”, namely that suddenly U.S. consumers stop spending like they did in 2008.

Between 2009 and summer 2011 emerging markets continued their ascent but high oil prices and the weak housing market hampered the United States. A similar situation happened in the 1970s when Southern America and Europe showed far higher growth than the U.S.

While these improvements helped the oil price, the U.S. trade deficit increased. This resulted indirectly in higher US debt.

US Public Debt vs. Gold Price

While the U.S. has high debt and trade deficits, countries like Germany or China exhibited current account surpluses and high savings. These must be:

  • Either be invested in the local economy: investments in real estate or fixed assets boost commodity prices and via factor (1) the gold price.
  • Or they must be exported with the financial account of the balance of payments: Central banks in EM often buy hedges against inflation, more in point 4.

If capital exports are smaller than the current account surpluses, then the currency is a rare good, it typically appreciates. When the yield of foreign investments is too low (see also factor 5), then surplus countries prefer to invest in the local economy, often in real estate to counter inflationary effects.

None the less, with rising wages and partly due to the stronger real effective value of the yuan, the Chinese current account surplus has considerably weakened. Recent data showed a Chinese trade deficit, even if distorted by the Chinese new year.

China Current Account and Real Exchange Rate Krugman

China Current Account and Real Exchange Rate (source Paul Krugman)

Stronger investments and real estate prices in the U.S., however, tend to weaken the gold price. Rather, they raise expectations of a US interest rate hikes (see point 5).

Trade Balance Ex With Petroleum Feb 2013 Oil

The graph above shows that the monthly U.S. trade deficit ex-petroleum has remained pretty stable around 25$ bil. US$ for 13 years, except some excesses before and some temporary improvements after the crisis. This implies that the U.S. trade balance is mostly dependent on supply and demand of oil (factor 1).


4) Gold prices are correlated to central banks’ activities

For decades central banks in Europe and Emerging Markets relied on buying US treasuries – often bought in times of lower U.S. inflation – or gold – in times of high U.S. inflation. The reason was that due to the potential of higher wage hikes compared to the richer Americans, the European or EM currency risked to depreciate for example in risk-off phases. This could again trigger inflation, higher wage demands, more inflation, and finally hyper inflation.

Hence holding U.S. treasuries or gold fulfilled a double advantage: the central bank had inflation-resistant reserves and could profit on an appreciation of the dollar or gold.  Traditionally EM relied more on buying U.S. Treasuries. From the year 2002 on, however, most EM currencies improved against the dollar and destroyed big parts of their central banks’ profitability. This intensified after 2008 when the US treasuries yielded less than the high rates EM central banks had to pay on their deposits in order to prevent an overheating of their economies.

To avoid a potential bankruptcy, they bought more and more gold that – as we know – as inversely related to the dollar.

Emerging Market Currencies

Between 2010 and 2012 more and more central banks in EM reduced their dollar share and bought gold instead. China holds 1.7% of reserves in gold, India 10%, Brazil only 0.5%. In particular, countries with current account deficits, like India (10% central bank gold holdings), Belarus (30%), Egypt (25%), often prefer gold to stabilize their currency, while Western central banks still stick with the former IMF rule not to buy gold any more.

The gold share of EM central banks is still relatively low today, whereas it is very high for many European countries. The reason is that the central banks of Germany, France and Italy (all three with 72% gold holdings, see the full list of global gold holdings) could build up their reserves during the Bretton Woods era. The following charts show the gold purchases of central banks and the increase of currency and gold reserves of emerging markets compared to US GDP.

Central Bank Purchases and Rising FX Reserves Emerging Markets

Europeans filled up their gold reserves during the Bretton Woods system, due to rising U.S. inflation finally at a relatively cheap price.

In the Bretton Woods system, all other countries fixed their N currencies against 1 currency, the US dollar. The Fed was obliged to exchange one ounce of gold into 35 US$. This created a so-called N:1 currency system. The U.S. president Nixon closed this cheap gold at 35$ window in 1971.

With flexible exchange rates gold lost its status. The IMF demonetization of gold policy even urged central banks to sell their gold, countries like the UK and Switzerland followed these calls.

Today the Fed is still the leading central bank in an implicit N:1 system of central banks, sometimes called “Bretton Woods II”. A weak U.S. economy still urges the Fed to act within its double mandate of maintaining low inflation and reducing unemployment. The Fed often implements easing measures and expands its balance sheet. Typically gold prices rises and the US dollar weakens after this quantitative easing”, because private investors and some central banks move out of the dollar into gold.

When, however, U.S. unemployments falls, then the dollar appreciates, money gets more tight and investors shun EM (see factor 2), oil and commodities prices fall because investments in particular in EM become more expensive (see factor 1) and with lower oil prices the US trade deficits diminishes (see factor 3).

Recent developments (2013/2014):


5) Gold and silver prices rise with falling U.S. real interest rates, with “financial repression”

Still today American funds are the most important driver of financial markets. Therefore gold and silver prices fall when for these investors U.S. treasuries become more attractive relative to gold or silver. In times of high real interest rates, the gold price is weak and vice verse.

Real Interest Rates vs. Gold Price United States

The following graph gives a bit more differentiation. It shows periods when the simple relationship stipulated in this point gets overlaid

  • by factor (1), the development of commodity prices and global growth – between 2005 and 2007 (despite positive real interest rates)
  • by item (2), when inflation rose more quickly than rates – between 1977 and 1980 (despite slightly positive real interest rates).


The gold price falls when the U.S. economy improves and the chances of a Fed Funds rate hike increase, even if this hike is far in the future. Particularly when more U.S. jobs are created, then gold and silver prices decline.

Wages as underlying factor for interest rates and the gold price

During the 1970s, inflation expectations and consequently wages rose in response to oil shocks and rising oil prices. The gold price moved upwards together with wages and oil prices.


The Fed chairman Volcker finally hiked interest rates so that unions stopped higher wage demands, new supply (e.g. North-sea oil) suppressed the oil price and the incomes of emerging markets. Global growth was sluggish. Consequently the Fed managed to keep inflation under control, company margins and stock price rose again: The Fed destroyed the gold price.

In the year 2013, the opposite picture arrived: U.S. wages had been nearly steady for years, but company margins were increasing. The wage share of GDP is declining, while companies could profit on global supply chains and cheap labor in emerging markets. Leading economists like Paul Krugman, spoke out in favor of rising wages.
For us it implies that the Fed should continue to support gold prices.



6) Gold and silver prices move with physical supply and demand


Update 2013: Demand and supply for physical gold and silver diverted sharply.

Gold Futures price vs. Gold coin sales and ETF gold holdings


The above five factors are certainly visible in the supply and demand situation for gold and silver, still price movements are often more reflected in modern instruments like ETFs and futures. ETFs made it possible that new investors were able to buy the metals more easily.  With the resurgence of Asia after the crisis of 1998, gold and silver prices have seen a big bull run. One reason is that China and, even more, India have a strong gold and silver tradition and massively increased their physical purchases.  The Indian savings rate is over 20%, a bigger part of savings move into gold.

Silver has more industrial use, often in emerging markets. Silver reacts more strongly to physical supply and demand than gold.

Other commodities, especially oil react very strongly to temporary disruptions of supply. This is not the case for gold: temporary disruptions like a strike of South African miners does not affect the price very strongly.


Newly discovered gold in California weakened its price in the 19th century. Silver appreciated with higher industrial use at the end of 19th century. Silver prices also rose with the switch of the Netherlands and India to silver-backed currency. As a consequence, some years later, cheaper gold and higher silver prices let many central banks switch from bi-metal or silver-backed currencies to gold-backed currencies, to the gold standard. The CEO of Barrick in a note to shareholders, said that:

In 2011, the company performed well against this strategy. Barrick met its operating guidance for the ninth consecutive year, producing 7.7 million ounces of gold at total cash costs of $460 per ounce, positioning Barrick as one of the lowest-cost senior gold producers. (source)

George Kesarios explains here that gold prices can even move under production costs like in the 1990s, but he sees the production price around 1000 US$.

In the second part we explain which of these long-term fundamentals for gold and silver are still positive by April 2013.

In the latest update we explain that the Fed destroyed the gold price in the early 1980s, but now they will continue to be the biggest supporter of the gold price for years.

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

When Will the Renminbi Become a Reserve Currency?

We recently explained that China will overtake the United States not only for GDP but also for wealth. In this post we explain what is still missing to become a world reserve currency and how quickly this could happen.

In our recent analysis “How Long Will the Dollar Be the Major World Reserve Currency? A Look at Wealth” we showed that in about ten years the Chinese will overtake the United States not only for GDP but also for wealth. In the post “Will the Dollar Appreciate on higher U.S. Savings and a Smaller Trade Deficit?” we discussed what happens if the U.S. would not have big trade deficits any more.
Since China is as much addicted to imported oil as the U.S. we could imagine that in  twenty years time the Chinese will be richer than the U.S. but that a Chinese (oil) trade deficit forces the Renminbi (sometimes also called “Yuan”) into a reserve currency status.

Still, in our discussion we did not look at other factors like the followings:

  • Nearly all commodities are priced and settled in dollars. Much international trade is invoiced in U.S. dollars, even when the United States is not the source or destination of the goods or services involved in the transaction.
  • The United States has the largest, most liquid and most transparent financial markets in the world.
  • Many countries, including several with significant international reserves, rely on the U.S. for military protection.
  • Finally, since a high proportion of the external liabilities of many countries are U.S. dollar-denominated, holding reserves as dollars is a form of asset-liability matching.

John Mauldin gives insights how far the Chinese Renminbi could become also a reserve currency as for financial transactions.

Extracts from The Renminbi: Soon to Be a Reserve Currency?

I think the answer to those very important questions will increasingly be the RMB. What you have witnessed in the past two to three years is China making a very apparent play to internationalize its currency. In just two years, China has gone from settling 0% of its exports in RMB to settling 18% of its exports in RMB. Two years ago, the RMB was a non-currency [in international trade/finance]. Nobody owned it. Nobody traded it. Today, the renminbi is already – in just two years – in the top ten traded currencies in the world…. [See the table my research staff found, below. –John]
I think this shift is taking place because China has a massive comparative advantage that most people never think of. If I asked, “What’s China’s comparative advantage?” 99 out of 100 people would say “cheap labor,” but that’s not true. Labor is not that cheap in China anymore. China’s comparative advantage is that China – alone amongst emerging-market nations – has a deep and credible financial center. It takes 50 years to build a financial center – to, you know, have auditors, lawyers, accountants, judges. And China is very lucky, because in 1997 the Brits – who are quite good at building financial centers – basically built one in Hong Kong and told China, “Here it is. Try not to mess it up.”

For twelve years, China did nothing with Hong Kong. It was kind of a deal of “You don’t bother us, we won’t bother you. We’ve got other fish to fry.” And that worked well until all of a sudden, in the past two to three years, China has been internationalizing its currency through Hong Kong, and it is taking off like wildfire. We always talk about what you see and what you don’t. Everybody talks about the China slowdown. Everybody talks about the impact this is going to have on commodities, on countries like Canada, on countries like Australia. Nobody talks about what you don’t see. And what you don’t see is that China is slowly but surely internationalizing its currency. It’s slowly freeing capital controls. It’s creating deep and liquid capital markets, and this is going to change the way that companies and individuals finance themselves among emerging markets. It’s going to make for more stable emerging markets and hopef ully for higher growth.

Just as Louis Gave predicted years ago, the Chinese RMB has continued to quickly climb the ranks from an internationally non-existent currency to number nine on the list!

This process is happening at lightning speed by historical standards, but we can still expect it to progress over the next 5-10 years. The renminbi is still only involved in 2.2% of foreign currency transactions, but this number can take a big jump when the RMB floats freely, though there is a big difference between the RMB and the true reserve currencies (USD, EUR, JPY, GBP) today. (Note that the renminbi is also called the yuan, abbreviated as CNY in the chart below.) As Louis mentioned, China stands alone among the emerging markets as having the only mature and credible financial center with deep and liquid capital markets, in Hong Kong. The building of a true global financial center typically takes about 50 years, so China is taking advantage of its lucky break to fast-track its currency to reserve status.


What may speed the process up is increasing cooperation between Chinese officials and the UK government to support RMB internationalization through London’s FX markets. Gregory Clark, Financial Secretary to the UK Treasury, was in Hong Kong this past week and wrote an op-ed in the South China Morning Post. Let’s look at a few telling sentences:

Over 50 percent of UK investment in Asia is in or flows through Hong Kong. That is a tremendous vote of confidence in Hong Kong by UK companies….

Bilaterial trade in goods between Hong Kong and the UK rose by 13.5% between 2009 and 2012, to a total value of £12.1 billion in 2012. This makes Hong Kong the UK’s second biggest export market for goods in Asia Pacific….

According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), London now accounts for 28 per cent of offshore RMB settled transactions.

In London, the volume of Renminbi-denominated import and export financing has increased 100 per cent since 2011. This is delivering real benefits and savings for business. It is estimated that firms can reduce their transaction costs with China by up to 7 per cent by denominating their trade in Renminbi.

The Renminbi’s rise is being enabled not just in Hong Kong and London. Chinese banks have established clearing banks and accounts in more than 80 other countries in the last four years. But the story runs even deeper. It appears to me that China is getting ready to create another Hong Kong in the traditional financial center of China, Shanghai. My good friend and decades-long China expert Simon Hunt notes:

The proposed development of the Free Trade Zone (FTZ) in Shanghai, covering 28sq km, will have huge consequences for China’s financial markets and that of the world. It will be a tax-free zone; the RMB will be fully convertible; the FTZ will have its own rules and regulations that cannot be trumped by central government; it will be legally outside the Chinese Customs, in fact a separate territory inside China; it has the effect of abolishing control over capital account investment, so allowing freedom to set up all kinds of companies and moving capital in and out of the FTZ, meaning in and out of China; it will become an international settlement centre for international trade and it will allow banks within the FTZ greater flexibility in conducting business. In short, the implications of the development of the FTZ, if the pilot scheme goes smoothly, will be humungous not just for China but for the global economy.< /p>

One near-term consequence will be that interest rate arbitrage can be more effectively conducted in the zone and will take business away from Hong Kong and Singapore. Chinese companies won’t have to set up offshore companies in Hong Kong or Singapore to conduct this business. Already, Chinese and foreign companies are either renting space, putting up buildings or buying office space in the FTZ, just waiting for the final details to be publicised.

This move makes sense for China, as it is a large step toward eventually floating the currency, which is yet another requirement for a true reserve currency. I’ve written in the past that I think the initial move when the Chinese eventually float their currency will be for the RMB to go down against the dollar (although longer-term it should become quite strong), because there is a lot of money in China that would like to diversify. Setting up a free-trade zone, as they propose in Shanghai, is a way to slowly let the air out of the balloon and perhaps even avoid the dramatic dislocations that might occur if they were to float the currency all at once.

Even so, internationalizing the RMB carries a lot of risk, so why does China really want to globalize its currency? Summarizing from a recent report from DBS Bank (based in Singapore), we can piece the picture together:

  • “China has experienced 35 years of relatively stable 10% GDP growth. It’s 28 times bigger today than it was in 1978. Why risk this kind of success for a globalized RMB and an open capital account?
  • The structure of the global economy has changed radically since 1978 while the financial architecture has changed barely at all.
  • Between now and 2020, China’s two-way trade will grow by $4 trillion. That’s nearly the size of the entire of offshore eurodollar market.
  • China doesn’t just want a globalized RMB; it needs one. The Middle Kingdom’s growth since the 1970s can largely be explained by mobilizing two key factors of production: land and labor. Now that economic growth is slowing in China as a whole (although there are still regional booms in some areas), Chinese policymakers hope they can regain momentum by mobilizing the last factor: capital.

For China to become a powerhouse exporter of its own products, it is eventually going to need to be able to offer financing to its ultimate customers in Indonesia, Vietnam, and the rest of Asia. If you are competing with Caterpillar and Komatsu, you not only need to have a less expensive product, you need to be able to offer financing. The same goes if you’re selling telecom gear, power-generation equipment, automobiles, or bullet trains.

In order for a currency to achieve reserve status, there has to be something for the country receiving the currency to invest in. If a country receives US dollars, they can invest in our bonds and stock markets. Just a few years ago, China created the dim sum bond market in Hong Kong, which is beginning to provide a real investment alternative for emerging markets – particularly in Greater China and Southeast Asia, where trade is largely intraregional. With China’s having the largest trading flows in the world (it just passed the US, by roughly $1 billion, in 2012), a free-floating RMB could quickly reach reserve status and, oddly enough, take FX market share from the USD, which could become be too strong and too scarce to work well in global trade.

China is on its way to becoming a reserve currency not because of weakness in the US dollar but precisely because the US dollar is going to get stronger and become less readily available. Countries are going to need to be able to trade in something besides dollars. It simply makes sense that if 20% of an emerging-market country’s trade is with China, it should do the trades in RMB rather than in relatively scarcer dollars. Of course, this means that China needs to have a relatively stable monetary policy so that its trading partners will have confidence in the long-term RMB, but China realizes that. And of course the RMB will have to meet all the other requirements for being a reserve currency.

Note that there is a difference between a reserve currency and a safe-haven currency. A safe-haven currency must be immune from government confiscation, currency controls, taxation, rapid exchange-rate depreciation.

As I mentioned, the RMB will probably depreciate rather than appreciate when the currency floats freely. There is a lot of capital trapped behind China’s capital-control wall that wants out, and party leaders know the trick is to make the transition to floating very gradually and without precipitating a crisis. 


John Mauldin

John Mauldin’s homepage


Thanks to John Mauldin, for the points on the Renminbi, we were still missing. Still we doubt that capital is behind  the Chinese wall.

From Forexlive:


I’ve been spending a lot of time reading about offshore tax evasion methods in the past couple weeks and it’s truly a staggering and game-changing phenomenon. In any multinational or jurisdiction where it isn’t yet present, it will be soon.

Exhibit A: New York real estate is the new Swiss bank account

30% of all apartments between 49th and 70th Streets and between Fifth and Park Avenues are vacant at least 10 months of the year. And since 2008, around 30% of condo sales in large-scale Manhattan developments have been by buyers with overseas addresses or through secretive LLCs.

Via Bloomberg: Secret Path Revealed for Chinese Billions Overseas

For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country’s currency restrictions.


Nowadays, capital always finds it way, and it will find it before the official start of the free-floating Renminbi.


George Dorgan,



Swiss customs: first time detailed trade statistics for gold available; Asia main export market

 via Financial Secrecy Media Monitor 

The data on Swiss trade in precious metals for January 2014 has been broken down by country for the first time in 30 years, report and It shows that Switzerland imports most of its gold, silver and precious coins from the UK, while its main export markets are in Asia. Total exports were over 5.3 billion euros in January, while imports were worth almost 6 billion euros.

trade Swiss Jan 2014

Swiss Trade in Gold in January 2014

The press release by the Swiss Federal Customs Administration has the breakdown by country.

source: based on Swiss Customs press release, exchange rate via

The data  also shows that that trade in gold bars grew rapidly after around 2005, and that Switzerland now exports gold bars worth over CHF 100 billion a year.

Swiss trade in gold bars, billion CHF

gold trade historic

Source: Swiss customs press release

No explanation is given in the press release for this sudden growth since 2005. Given that Switzerland is a commodities hub and not a producer there was most likely a change in trade regulations or taxation around this time.

The Swiss typically import gold in bullion from the United States or the UK and export it in smaller units, like coins, to Asia.


 Swiss Exports to India

Read more background:

The Collapse of the Bretton Woods System, the German Current Account and Gold Reserves

German, Swiss and Japanese gold reserves rose continously in the Bretton Woods system, whereas American and British reserves fell. The reason were persistent German, Swiss and Japanese current account surpluses but US and UK deficits. None the less, the gold was and is still stored in the United States or in the UK, but the official owners are abroad.

Gold and FX Reserves US, Germany, Switzerland, UK, Japan 1950-1970 vs. German Gold

Gold and FX Reserves US, Germany, Switzerland, Japan 1955-1970 vs. German Gold


Already in 1965, the former French president De Gaulle knew that the Bretton Woods system would collapse. He understood that gold was worth far more than the 35 US$ agreed in the system.

From the introduction of the EMU in the 1990s and even more from the euro introduction in 1999 this changed again: The Bundesbank bought assets from the European periphery and France instead, in the last ten years via the Target2 balances.

German Gold Reserves between 1952 and 2012

German gold reserves in million ounces 1952-2012

While the trade surplus amounts to 8% of GDP, the surpluses are not exported via the capital account, but the current account surplus remains on the Bundesbank balance sheet. In 2012 the BuBa possessed assets for around 50% of German GDP. On the contrary, a capital flight further blew up the Bundesbank balance sheet. Since October 2012, however, the capital flight is reduced, the target2 balance has decreased and the Bundesbank balance sheet has become shorter again.

Trade Surplus vs. Bundesbank Balance

German Trade Surplus vs. Bundesbank Balance 1950-2012 (till 1994 only rough estimate of Buba balance) , click to expand Sources 1. destatis, 2. crp-intotec, 3. Arbeitsagentur, 4., 5.Deutsche Bundesbank


In the future foreign German gold reserves will partially come back to Germany.

New Gold Storage Buba

Source Bundesbank

For the readers who are able to read German, we provide here the full background, the history of the German revalutions during the Bretton Woods system and the 1970s by former Bundesbank president Otmar Emminger (+ in 1986)

The file is also available here.

More on the history of gold in the 20th century here.


George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.


Swiss Gold Referendum and SNB’s Opinion: An Exchange of Arguments

Already in 2013, the Swiss National Bank (SNB) spoke out against the gold initiative and revealed that the Swiss gold is stored mostly in Switzerland and 20% in the UK and 10% in Canada. There is no Swiss gold in the United States according to SNB chairman Jordan. In this post we provide an exchange of the Jordan’s arguments against the gold referendum and our way of viewing it. Our view is not that strict as the one of the referendum proponents.

  1. The gold of the Swiss National Bank must be stored physically in Switzerland.
  2. The Swiss National Bank does not have the right to sell its gold reserves
  3. The Swiss National Bank must hold at least twenty percent (20%) of its total assets in gold
The SNB expressed its opinion.

Extracts from the speech given by Thomas J. Jordan Chairman of the Governing Board, at the General Meeting of Shareholders of the Swiss National Bank, 26 April 2013, source:

Jordan: In my following remarks, I would like to speak about the subject of gold as part of the SNB’s currency reserves. As reported in the media last week, the so-called gold initiative has formally qualified for a referendum vote to be held. This popular initiative demands that the SNB hold at least 20% of its assets in gold, that it be prohibited from selling its gold reserves and that all gold reserves be physically stored in Switzerland itself.

The SNB does not generally comment on any political initiatives. However, the gold initiative has a very direct impact on the SNB’s capacity to act. This is why we are taking the opportunity today to present our viewpoint for the first time on the demands of the initiative. The initiators see a high level of gold reserves as a guarantee for currency stability. They fear that the Swiss franc will decline in value and that price stability will be threatened if a large proportion of the balance sheet does not consist of gold holdings. They are also concerned that the SNB’s gold reserves held abroad are not secure and will not be accessible in critical situations. We share the objectives the initiators put forward, such as maintaining currency and price stability and ensuring both the SNB’s capacity to act and its independence. However, the measures proposed to this effect are not suitable; in fact, they are even counterproductive.

Instead, they are based on misunderstandings about the importance of gold in monetary policy and would compromise the SNB’s capacity to act in pursuing its monetary policy, which would run counter to the objectives envisaged. In other words, these measures would, in certain situations, considerably hinder the SNB in fulfilling its monetary policy mandate and be detrimental to Switzerland. We therefore consider it our duty to point out the serious disadvantages of the initiative already at an early stage.

Having said that, however, the SNB is interested in a dialogue on any questions connected with the initiative. With this in mind, allow me to make a few remarks. The SNB has the statutory mandate to ensure price stability, while taking due account of economic developments. The monetary policy operations that must be carried out in fulfillment of this mandate have a direct impact on the SNB’s balance sheet. In order for the SNB to fulfill its mandate at all times, its capacity to act in monetary policy matters must not be compromised by rigid rules on the composition of its balance sheet, which would be the case with the required 20% minimum share of gold and the ban on the sale of gold. It was precisely the latest crisis that demonstrated how important it is for the SNB to have the flexibility to expand its balance sheet, if needed. In future, the SNB will also need this flexibility to reduce the balance sheet again, if necessary.

Our opinion: The SNB reduced its balance sheet with the SNB gold sales until the year 2007, when the gold price was weak. In 2007 the euro hovered around 1.60 CHF. At the time there were discussions if the currency reserves were still needed. But the decision was to keep the “fiat currencies”, even if the franc was undervalued. The expansion of its balance sheet from 2008 on was done only based on fiat currencies. In 2010 the SNB obtained a big loss on these currencies while the gold price continued to rise.

Jordan: The demands of the initiative would considerably curtail this flexibility. Were the initiative to be accepted, the SNB would in the current environment have to make large scale gold purchases to meet the required 20% minimum share of gold. It would not be allowed to sell this gold at a later point, even if it had to reduce its balance sheet again in order to maintain price stability.

Our comment: The proponents of the initiative suggest to sell the recently acquired fiat currencies and realize the profits obtained with the strengthened dollar and with euros. SNB’s balance sheet really exploded in August 2011. At that time, the central bank bought euros between 1.00 CHF and 1.10 CHF and dollars under 0.80 CHF. This realization of profit would reduce the balance sheet, but possibly would send the euro to 1.10 CHF. But it would help to maintain obtain price stability. As opposed to the SNB, they judge that slight deflation caused by technological improvements or lower oil prices is beneficiary and also implies price stability.



The demand that the gold reserves cannot be sold are effectively very restrictive and should be over-thought.  We judge that a minimum of 10% gold and a target value of 20% over the longer term should be achieved. It should be possible to buy up to 5% in the form of gold ETFs.

As long as the Chinese Renmimbi is not fully convertible and dominated by an authoritarian regime and as long as US treasuries deliver negative real interest rates, gold is reestablished as reserve currency for many central banks in emerging markets. In 2013 and 2014, ten year US treasuries achieved positive real interest again; gold weakened.
The Swiss franc, similarly as gold, acts as safe proxy to strong Chinese and global expansion, avoiding the risks of holding Chinese assets. The reason are  the strong exports of Switzerland and the closely related German economy to China.

Jordan: In a worst case scenario, the assets side of the SNB’s balance sheet would, over time, be largely comprised of unsellable gold. Managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet; in practice by issuing the SNB’s own interest bearing debt certificates (SNB Bills). This would have serious financial consequences: On the assets side, the SNB would neither have any interest income nor could it realise any profits on gold due to the ban on sales. On the liabilities side, it might have to pay high interest on debt certificates. The SNB could therefore find itself in a situation in which it could only finance its current expenses by means of money creation.

Our opinion: This argument seems to be flawed: If the interest rate of SNB bills rises then we are typically in an inflationary scenario, in which also the gold price increases. With falling inflation both interest on (newly issued) bills and the gold price would fall.

The only exception would be a considerable deterioration of the Swiss economy, in which Swiss inflation is far higher than US inflation. We remember well the 1990s when this happened. The phase of higher Swiss inflation ended in a real estate bust, favorited by late SNB rate hikes. The SNB is paving the path for a similar situation with its expansive monetary policy and risks to be too late once again.

Jordan: The far reaching demands of the gold initiative would inevitably have repercussions for our monetary policy. In making its monetary policy decisions, the SNB would have to consider the long-term consequences the necessary gold purchases would have on its capacity to act and on the structure of its balance sheet.

Furthermore, market participants would hardly regard monetary policy decisions as credible, should these decisions involve a substantial expansion of the balance sheet, which in turn would impair the effect of monetary policy. It is unlikely that decisions such as the introduction of the minimum exchange rate or the stabilisation of UBS would have been made in the same way given these circumstances.

Our opinion: During the crisis in Summer 2011, risk aversion and Fed’s monetary expansion drove the gold price to nearly 2000 US$. The gold-related Swiss franc overshot to EUR/CHF of 1.00. The SNB has correctly seen this overvaluation of the franc. As measure the SNB introduced the minimum exchange rate of 1.20. For us this 1.20 was too high. The choice of 1.10 EUR/CHF would have reduced considerably the SNB balance sheet, because the Swiss franc safe-haven would have been more expensive for foreigners.  Hence the expansion of the monetary base might have been only half as big. This excessive money might lead to mis-allocation of resources, to a boom and finally to a bust of Swiss real estate. The question remains how long this process of boom building takes.


CHF vs. Gold in 2011

CHF vs. gold (GLD ETF) in 2011

Instead of buying fiat currencies in huge quantities and financing it with newly printed Swiss franc, the SNB should have been able to sell some gold reserves exactly in that moment, for example in the form of ETFs. However, since it sold so much gold earlier (for far cheaper prices), this did not make sense. According to Q2/2014 data, the SNB holds 8% of its assets in gold.


Jordan: This constraint on the capacity to act would not be in Switzerland’s interest. Gold is nevertheless an important component of the SNB’s assets. However, this is not because gold guarantees price stability. In today’s monetary system, there is no direct connection between the proportion of gold on the SNB’s balance sheet and price stability. This is also evidenced by the fact that the objective of price stability has been better achieved.

In recent years, even though the proportion of gold on our balance sheet was smaller, than at times when gold accounted for a much larger share. A high proportion of gold on the balance sheet is no guarantee for price stability. There is another reason why gold is useful for the SNB and Switzerland. As part of a good diversification of currency reserves, a certain proportion of gold can help reduce the balance sheet risk. We have therefore never ruled out the possibility of future gold purchases.

Our opinion: Effectively the (at the time) 15% gold share in 2010 reduced SNB losses for the year 2010 considerably. Gold has two functions for the Swiss and its central bank: It protects against inflation and helps to reduce balance sheet risks, because the Swiss franc is correlated with gold.

 Jordan: At the same time, however, gold is also one of the most volatile and thus riskiest investments. A high proportion of gold would increase the SNB’s balance sheet risk. With the increasing share of gold on the balance sheet, a secondary effect would be that the profit distribution to the Confederation and the cantons would likely be lower. This is because, unlike foreign currency investments, gold does not generate income in the form of interest or dividends, and any valuation gains on gold could not be realised because of the ban on sales.

Our opinion: The recent years have shown that gold is very volatile. The reason is again the Fed. When they decided to reverse course in June 2013, Emerging markets did not have the cheap money supply from the U.S. anymore. Instead central banks of these countries kept money tight, which increased costs for businesses, for credit and personal spending. This slowed them significantly that hindered their wage and spending expansion.
The argument that gold generates no income has to be put into perspective with the historically proven fact that gold appreciates in periods of negative real rates and financial repression. Once again we agree with Jordan, that the total ban of gold sales is counterproductive.

Real Interest Rates vs. Gold Price
George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

Which Of The Six Major Fundamental Factors For Gold And Silver Are Still Positive? Which Are Not? (April 2013)

In the first part we identified the six major fundamentals that drive gold and silver prices. In this second part we speak about the relationship between gold and silver. We explain which fundamental factors speak for an increase of gold and silver prices and which don’t.

Since fundamentals are very difficult to grasp, many people trade gold and silver based on technical support and resistance levels and is far more subject to speculation.

Many investment advisers were and are moving out of gold. In February the Swiss Pictet decided to reduce its gold share after 10 years of success with their gold investment. The gold price is in a technical bear market.


Gold/silver correlation

Central banks do not buy silver, but gold. In response to central banks’ actions, silver prices only rise with the gold correlation. In crisis moments the gold/silver ratio increases, similarly as the gold/oil ratio.

Gold-Silver Ratio since 2003

The gold/silver ratio is particularly small when both emerging markets and the United States expand, but the growth of emerging markets is far higher, like between 2009 and April 2011. After that the European debt crisis and a slowing in emerging markets helped to increase the ratio again. Silver prices are more closely related to copper.

The six fundamental factors in a review

The six fundamental factors have for us the following future tendencies.

  1. Price movements of other commodities in combination with global commodity demand. We think that global growth, in particular in emerging markets, will resume once risk aversion and high inflation in emerging markets have calmed down. A recovery of the European economies, in particular of Germany, will help to improve global growth.
    Brent oil prices seem to be currently depressed more because of seasonal Chinese demand weakness than due to the increased U.S. supply and the new fracking techniques.Chinese oil demand alone typically rises by 5-9% per year or an average of 1.0 million barrels per day (Mb/d), while shale oil in the U.S. could reach a maximum production of 2 to 3 Mb/d by 2035 and currently produces 0.9 Mb/d. The weaker Chinese GDP growth of 7.7% is still high enough to support 5-9% oil consumption increase. Hence over the long-term Brent oil prices should rise again. This is positive for gold, silver and other commodities. Non the less, we recommend gold investors to understand oil price cycles, the mechanisms of oil supply and demand.

    The U.S. housing market still shows some indications of an oversupply. Chinese authorities are trying to tame  excessive demand, the PBoC keeps rates high, the government restricts possibilities of a buying a second home, apart from speculation these are signs of under-supply, while Chinese commercial properties show already an over-supply. This has a  negative effect on construction activity and commodities like copper. Falling commodity prices, however will increase margins of home-builders and increase activity over the longer-term. In the U.S., however, the recent increase of home prices is often driven by investors and not families.

  2. Global money supply and inflation
    With continuously rising wages in emerging markets and monetary expansion in many developed nations, we reckon that disinflation, the reduction of inflation, will end soon, even if the mainstream media currently and possibly for years have over-emphasized low inflation and low credit growth. Russian, Turkish, Indian and Brazilian and South African inflation figures are around 6% and more, not much less than during the peak of 2011.
    Thanks to the stronger yuan and a high manufacturing share that correlates with commodity prices, Chinese inflation has dropped to 3.1%. While high inflation in developing nations did not matter much until the year 2000, the rising GDP share of these nations have an influence not only via the factor “global inflation” but also by “physical demand” (point 6) as inflation hedge.
    Similar as Bill Gross we judge that U.S. inflation might pick up in the coming years because the job market is structurally split in people “in the labor force” and the ones “out of the labor force”. Higher wages for the first group might lead to higher price inflation over the longer term, but the Fed will still be reluctant to hike interest rates because of the second group and high public debt. Core CPI inflation in both Europe and U.S. of nearly 2% despite high unemployment is a symptom of central banks flying blind into unscattered territory.Markets, however, did already anticipate high future U.S. inflation, visible in the increase of gold/US CPI ratio that has recently fallen under 7.
    Many gold bears use the high gold/CPI ratio as counter-argument. They ignore that the gold/CPI ratio for many emerging markets did not increase that much. Indian prices are five times higher than in 1993, but the gold price quoted in Indian Rupee has risen by the factor 9.
    Gold Price in Indian Rupee
    In summary, we see inflation rising in the U.S. and continuing higher inflation levels in emerging markets over the longer term.
  3. Trade and growth imbalances, the U.S. twin deficits and the “fear factor”
    Global imbalances are partially reduced, thanks to high wage increases in emerging markets and slower demand in developed nations. Recession fears have greatly diminished and have been replaced by a “fear of dropping gold prices.”The US current account deficit has halved since 2007. Between December 2011 and December 2012 WTI oil prices fell from levels around 100$ to 88$. WTI oil is mostly an appropriate benchmark for imported US oil due a higher share of cheaper Canadian and Mexican oil.  This depreciation had as effect that energy made up only 33% of the U.S. deficit instead of 42%.Due to high import costs of oil, the surplus countries are less and less Asian economies, like China, South Korea or Japan, but increasingly European economies like Germany, Switzerland or Sweden. This is partially bad news for gold and silver, because those countries will not spur so many commodity-intensive investments like China did.
    The Chinese and Japanese, however, are the ones that will profit most on the decrease of Brent prices from 120$ to 100$ since last year. We judge that in some months China will see a trade surplus again and possibly even Japan. This will support gold and silver prices.
    The increasing public debt, however, is another reason to buy the yellow metal.
  4. Central bank’s activities like money printing or gold purchases and sales
    Smaller current account surpluses of emerging markets due to weaker commodity prices and higher wages will lead to smaller gold purchases by central banks. Thanks to smaller differences between emerging markets and US growth, Fed non-conventional easing measures might diminish over time. Both points are bad news for gold and silver prices.
  5. Real interest rates, in particular in the United States and “financial repression”
    Seven years after the start of financial crisis, the typical length of a weakness period in a credit cycle, a U.S. recovery seems to be possible, especially because emerging markets had high inflation and lost some competitiveness. We think that oil prices will rebound with stronger global growth, which is negative for the U.S. On the other side, a main argument for U.S. blue chips was and is their sales to emerging markets. U.S. firms cannot lead the global economy any more as they did until the 1960s and during the 1990s until the dot com bubble; the U.S. are similar to many German firms a slave of the global expansion.
    We reckon that the U.S. housing market might have recovered thanks to implicit purchases by the Fed and other state organizations. An exit from QE3 and a rate hike would be detrimental for US home owners. Therefore we do not believe in US rate hikes in 2015, like many members of the FOMC do. As long as the Fed does not hike rates, gold and silver prices will remain strong.
  6. Physical demand and supply
    We think that growth of emerging markets will be slower, but still high enough to support continuing purchases of physical gold and silver. More and more people will be able to purchase precious metals, last but not least as protection again inflation (factor 2). This is long-term positive for prices.
    For the supply side see the comments in the first parts or the comment below.

Summary and Outlook

For us, most fundamental factors (items 1, 2, 5 and 6) speak for an appreciation of gold and silver prices, while factor 4, smaller future central bank interventions, favor a further weakening. Point 3 is rather neutral. We give factor 5, the “financial repression” the highest importance: Despite improvements in the US economy, we do not see a rate hike coming in the next 5 years, but countries like China are still competitive enough to replace American manufacturing with cheap imports. In factor 2 we disagree with mainstream media: we see global inflation rising again.

Many factors like weaker growth of emerging markets might not have been priced in correctly in commodity prices and – as the gold-silver correlation shows – even less in the price of gold. One example, Chinese growth rates between 12% and 18% in 2007/2008 combined with low U.S. rates drove the oil price up to 150$, while growth of 2-4% let it fall to 30$ a barrel in 2009. The current price of 100$ for Brent oil does it point to a future Chinese growth rate of rather 6% (rather oil and gold-bearish) or better 8% (oil and gold-bullish)?

We think that Chinese authorities will offer more easing measures if Chinese GDP growth is really in danger to fall under the the promised 7.5%. This will sustain gold prices.

Chinese growth 2004-2013

Chinese growth 2004-2013 (source Pictet)

Technical movements might further depress gold and silver similarly as many investors might follow the bearish technical trend in gold and sell the metal. Gold and silver prices currently show similar high volatility like stocks in bearish markets like in 2008/2009 and August/September 2011. Prices are mostly driven by short futures, put options, margin calls and day traders, that sooner or later will exit the market again (see details). Volatile times, however, are the best periods for long-term investors to buy.


A gold plunge followed S&P’s weakening in 2011, in 2008 it was just the opposite (source Zerohedge)

Investment recommendation

On several occasions in October 2012 we recommended to sell gold and metals – here or here. In the current bear market gold and silver are getting interesting again; long-term fundamentals are mostly positive.

Our strategy would be to echelon gold and silver purchases at different entry levels, like a gold price level in the lower 1300s and at 1200. Due to the high gold-silver ratio and supply issues (see comment) we prefer to invest in silver instead of gold. In a US recovery helped by cheaper oil and gas prices, silver will advance first. If, however, stock markets follow the gold price plunge, then silver prices might fall with stocks, while gold will remain rather stable.

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.



Two Swiss gold referendum initiatives: “Save our Swiss Gold” and “The Gold Franc”

Two Swiss initiatives to save the money and the gold of ordinary people against the establishment

1) Save our Swiss Gold and 2) The Gold Franc.

Update 2014: White the referendum for “Save Our Swiss Gold” will take on November 30th 2014, the “Gold Franc” has been postponed.
In Switzerland there are currently two initiatives for a referendum concerning gold coming.

1) Referendum initiative: “Save our Swiss Gold”


  • The SNB should stop selling its gold
  • The gold has to be stored in Switzerland
  • Gold should represent at least 20% of the SNB assets

Did you know that

that the SNB has sold one ton of gold per day during five years ?

that 1550 tons of the people’s assets in form of gold had been sold for cheapest prices (between 300 and 500 US$)

when the concerned minister was asked where the SNB gold currently is stored, he answered in parliament: “Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know and because I do not want to know”

Read more about it in “SNB Concerned”: Does a Yes to the Swiss Gold Referendum Imply an End of the CHF Cap?

2) Referendum initiative: “The Gold Franc”

After the Swiss economic commission rejected the idea of a gold franc, the gold franc association took the way of the referendum initiative. The initiative will be started after the “Save our Swiss Gold” initiative.
Here the presentation of what a gold franc is from


Non-partisan project for the creation of a commodity based supplementary currency to the Swiss franc on a constitutional basis

The Proposal

Under the proposed parliamentary initiative 11.407 “Establishing a Gold Franc” ¹ the federal government establishes a second official currency in the form of a set of coins with a fixed gold content. The federal government regulates the naming and grants concessions for the minting of coins to suitable institutions and oversees the concession holders.

Benefits and Advantages

Simple: Buying and selling of gold becomes easier and cheaper. The Gold Coin Currency enables everybody, professionals and individuals, at all times to purchase or sell varying amounts of pure gold at a significantly lower cost. Coins of different size will be available, with the smallest containing as little as 0.1g gold in the form of a “Gold Core Coin”.
Practical: Gold coins are a practical and universal means for payment. Gold coins can be changed into any currency desired at the current value of gold. Further they can always be used worldwide as a means of payment for goods and services.
Safe: The gold content of each coin guarantees its value². As an additional official currency the Gold Coin Currency is subject to the same trade and tax laws as the Swiss Franc – both currencies are protected from fiscal levy’s and forgery.

Production, distribution and protection

The production of the gold coins is conducted by private companies with a concession from the federal government. The federal government maintains oversight of production in order to protect and safeguard the integrity of the coins.
The distribution of the gold coins by the licensed institutions is conducted through their branches, vending machines or ATM’s.
The legal protection of the gold coins from fraud and forgery is guaranteed by its constitutional basis.

Other important aspects

The Swiss Franc remains the primary currency while the Gold Coin Currency helps to stabilize the Swiss Franc exchange rate. The current Swiss Franc remains the main means for everyday payments, loans and investments. The Gold Coin Currency is an optimal addition to the Swiss Franc by offering a liquid and crisis resistent investment opportunity. It can also serve as alternative for foreign currency investments and help to stabilize the exchange rate of the Swiss Franc.
The duties and functions of the Swiss Central Bank are not affected. The constitutional mandate of the SNB regarding the issuing and the securing of the long-term value of the Swiss Franc, as well as, the management of the national gold reserves remains unchanged.
The Gold Coin Currency will give Switzerland new prestige. The Gold Coin Currency has the potential to become an attractive, secure and globally popular alternative currency thereby filling a significant gap in the world’s financial system. Its success could prompt other nations to imitate it which would help to restore Switzerland’s past reputation as a first-class and innovative financial centre and thus strengthen Switzerland’s global prestige3.

Promote the idea and realization of their political

To promote and realize the “Swiss Gold Coin Currency“, a politically independent, nonpartisan organization based in Zurich was set up in July 2011 . It consists of members from all over Switzerland, including senior figures from business, politics, media and science.


1 Parliamentary initiative: “The Swiss constitution shall be amended as follows: Art. 99, section 2, the Federal Government creates an official Swiss Gold franc with a set of coins with a fixed content of gold. It regulates the licensing of the institutions which may issue gold francs, tax-free.”
2 Gold is also subject to fluctuations in value. Compared to any other goods, however, gold has over a long time period and in many cultures been very stable in value, because it is a) limited in the available quantity (even while taking into account the known and suspected reserves); b) highly durable; and c) because of its unique usefulness constantly in demand (in the form of bullion, works of art, or parts of it – as well as for many handicraft and industrial products and in parts of production facilities etc. ).
3 Examples for concrete business opportunities: Gold Coin depots, Gold Coin accounts, transaction services, savings plans, investments, retirement plans (tax-exempt, new 3rd pillar C), annuities, life insurance plans, etc. Further: The licensed companies will be allowed to present themselves on the flip side of the coins with the name (symbol, logo). The corresponding worldwide marketing potential will cover a good part of the production costs of the coins.

The gold franc association recently organized a presentation of the Austrian economist Detlev Schlichter. Here the equivalent presentation at the Adam Smith Association:

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.


“SNB Concerned”: Does a Yes to the Swiss Gold Referendum Imply an End of the CHF Cap?

If the upcoming referendum “Save our Swiss gold” wins, then the SNB must increase gold holdings from less than 10% to 20% of its balance sheet. This possibly implies an end of the CHF cap. The referendum will take place on November 30th.

The “Save our Swiss gold” referendum

According to the upcoming referendum “Save our Swiss gold”.

  • The SNB should never be allowed to sell gold again.
  • The gold has to be stored in Switzerland.
  • Gold should represent at least 20% of the SNB assets.

Did you know:

That the SNB has sold one ton of gold per day during five years?

That 1550 tons of the people’s assets in form of gold had been sold for cheapest prices (between 300 and 500 US$).

When the concerned minister was asked where the SNB gold currently is stored, he answered in parliament: “Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know and because I do not want to know”.

With it the Swiss people will decide if the SNB should be obliged to hold gold with a minimum percentage of 20% of its total assets. Currently the SNB holds only 10% gold. With the weaker gold price this ratio has fallen to 7.8% in 2014.

The link to the gold initiative.

The accumulation and sale of Swiss gold reserves

Until the end of Bretton Woods, the Swiss managed to accumulate large gold reserves thanks to continuous current account and trade surpluses. For years the Swiss and the SNB resisted the rather Keynesian mindset of the International Monetary Fund (IMF), and joined this institution only in 1992. IMF membership implied that the Swiss had to change their constitution: until 1999 the franc was officially bound to gold. In a referendum, leaders convinced the Swiss to remove this dependency.

In the year 2000, the IMF intensified the “demonetization of gold” campaign that had started in the 1970s in the strong belief that the “New Economy” and the strength of the anchor currency of the global monetary system, the US dollar, and the newly created euro would be able to defeat any future supply-side and inflation issues. In a period of strong U.S. growth, high interest rates and low inflation, the central bankers thought that it was a “barbarous relict” to hold gold. Even if officially independent of governments, central bankers suggested that government bonds were the better deal, because “bonds generate income“.

Many central banks, like the Bank of England or the SNB, sold masses of gold, and most of the proceeds were invested in bonds denominated in the newly created euro. Germans, French and Italians, however, decided to keep their big gold reserves, possibly to give the euro better credibility.

Since the last gold sales in 2007, the Swiss have maintained the same quantity of gold. Despite the strong rise of gold prices between 2008 and 2012, the SNB never bought more gold. But people and central banks in China, Russia, India and other emerging markets purchased more. The gold price improved with higher oil prices, rising incomes and the demand from those “barbarous” countries. Many central banks had capital gains on gold thanks to those rising incomes in Emerging Markets.

Gold price vs. SNB Gold reserves

Gold price vs. SNB Gold reserves

Gold sales propped up finances of Swiss cantons

Between 2001 and 2007, the SNB made the Swiss cantons happy and delivered some billions of francs to prop up their finances. The gains were unfortunately not caused by strong asset management capabilities, but mostly due to gold price improvements and gold sales at quite cheap prices.

Average price of Swiss gold sales: CHF 16,241 per kilo
Price of gold end 2012:
CHF 48,815 per kilo
CHF 32,573 per kilo
MINIMUM cost of to sell 1300 tons of Swiss gold: 42 Billion CHF
(source SNB 2005 , the gold price is based on the SNB 2012 results)

For the proponents of the gold referendum, the SNB gold sales were the destruction of what their parents and grandparents achieved during the Bretton Woods period. As the year 2010 SNB results show, the remaining Swiss gold holdings prevented higher losses.  Unfortunately, the quantity of gold was less than half of that from the year 2000; otherwise, gains on the gold price would have completely neutralized losses on fiat currencies.

SNB Results vs. Gold 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013


Percentage of SNB gold holdings has fallen from 30% to 8%

The percentage of gold holdings to total balance has fallen from 30% in the year 2000 (despite low weak prices!) to 10% in 2012. The referendum proponents want to raise it to 20%.

Ratio Gold to Balance Sheet  SNB

Switzerland is not the only country where the gold share as percentage of central bank assets has strongly fallen: Germany had a gold share of 20% of total assets still in 2002 despite weak gold prices. Despite Germany not selling gold, the explosion of the Bundesbank balance sheet with EUR denominated claims, called Target2, let this percentage fall to considerably under 10%.

A referendum “Yes” implies a Swiss franc appreciation, end of the franc cap?


If the referendum is accepted by the Swiss people, then the SNB would need to:

  1. Either double the quantity of gold holdings (i.e. buy it expensive after selling it cheap)/
  2. Sell half of its fiat money reserves.
  3. Or a mixture of both.

In the first case, the gold price should rise and with it the gold-correlated Swiss franc. In the second option, the Swiss franc should rise even more.

Previously the franc was correlated to gold mostly thanks to low Swiss inflation and the (formerly) strong monetarist ideas inside the SNB.
Now the CHF is correlated to gold thanks to global trade surpluses produced by Swiss multinationals that correspond to rising global gold demand. The Australian dollar is a similar currency that profits on Chinese and global growth. Both the Swiss and the Australian currencies are often used as proxies for Chinese expansion, because they provide assets related to China without having the obligation to invest directly in Chinese investments.

Gold vs. "Globalization Currencies" AUD and CHF since 2008

                                                                                                                                                                                                                   The correlated “Globalization Currencies” Gold , AUD and CHF since 2008,  gold with higher volatility


SNB has considerable concerns

A spokesperson for the SNB said the central bank has “considerable concerns with regard to the monetary policy implications of the demands in the initiative“.
They provide three major arguments:

  • Buying so much gold would destroy the “ability to do independent monetary policy” and implicitly the EUR/CHF peg.
  • Gold generates no income as opposed to bonds (see above).
  • The gold price has a “far higher volatility”. Effectively Quantitative Easing provoked a strong improvement in the gold price and the reverse movement, the “tapering” a strong weakening. Based on this these two strong price movements, SNB officials claim that gold is too volatile and too risky.

We understand why the SNB has concerns. But looking back at cheap SNB sales of expensive gold or the financial crisis of 2008, the Swiss farmers’ shrewdness and gut feelings might be able to beat the mathematical models of (central) bankers once again.


Read also:

The full details, Swiss Franc History: The SNB Sells a big part of the Swiss gold reserves at cheap prices.

In Favor of a Yes:  Swiss Gold Referendum: Latest News, Parliamentary Speech Lukas Reimann

In Favor of a No: SNB chairman Jordan, his speech in PDF format

Swiss Gold Referendum and SNB’s Opinion: An Exchange of Arguments 


George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

Gold Tells the History of the 20th Century


Originally by Toyoyuki Sameda, a history of gold from a Japanese perspective, in 1999. We added some of our charts for the German and Swiss perspective.


The 20th Century has various features: it is called a century of war, technological advancement, atomic energy, ideology, economic growth, explosion of population, and so forth. But here it is also a century of gold. This is a history book written from the viewpoint of gold and exchange.

  • Note: Au (from Latin Aurum) Atomic number is 79, Atomic weight is 197.0, and most malleable and ductile of all the metals. It melts at about 1064 deg.C and boils at about 2808 deg.C. Specific gravity of 19.3. Mohs hardness is 2.5 -3. Abundance ratio is 75th in the crust of the earth.




0. Gold Reserve of Japan
1. World War I and Fall of Gold Standard

2. Between World War I and II
3. World War II and Gold Transportation
4. The Bretton Woods System
5. Free Floating Currencies



0. Gold Reserve of Japan:


Japan Gold 1905 - 1970

Sum of gold reserves of Japanese Government & Bank of Japan (1905-36, 1950-70, and 1998) Unit: Au. ton

(similar to Germany, we assume  that Japan sold all its gold reserves during the war against China and in WWII)

  • The above is the total specie reserve of Japan (Government + Bank of Japan) in terms of tons of gold.
  • World gold production increased averagely 3% per year in 60 years (1850 – 1910), scarcely exceeding economic growth of the same period.
  • The total reserve of gold could be a barometer of the national strength. Until the World War II gold ratio of the reserve was relatively higher, which was called specie reserve for convertible currency.
  • The reserve for foreign currency are usually indicated in prices, which is not a proper tracer in the inflationary trend. US government complies with the exchange into gold by the official rate of $35 per troy once (oz-t.; 31.1035 grams) The exchange market of each country was backed by mostly US dollars which were convertible to gold.
  • But since the Nixon shock proclaimed in Aug. 1971, US dollar became inconvertible to gold, virtually shifting to floating exchange system.
  • Under the gold standard system, one the trade deficit occurs, it means outflow of gold reserve (gold coins, gold ingot, gold bullion or other convertible exchange).
  • In 1911 K. Takahashi, governor of BOJ: “The best way to maintain the specie reserve is to develop domestic industry, but it requires further inflow of the foreign currency.”
  • The specie reserve in overseas usually exceeds that of in Japan.This trend becomes conspicuous in the years of inflow of large scale foreign debt.

1. World War I and Fall of Gold Standard:


  • 1912: Powder magazine – Balkan peninsulaGermany-Austria-Turkey-Bulgaria (Pan-Germanism) vs. Russia-France-UK-Serbia (Pan-Slavism)
  • 1914: Prince & Princess Franz Ferdinand assassinated at Sarajevo
  • 1914.7: World War I began in two weeks in Europe:Germany-Austria-Turkey vs. Russia-France-UK
  • 1914.8 Japan gate-crashed war, and occupied Qingdao.
  • 1914: Collapse of Gold Standard; NY & London stock exchange closed. Trench warfare both west and east front, escalating into all-our war.
  • 1915: Japan presents 21-terriotorial demands to China.
  • 1915: Wartime export bubble: as World War Iwas protracted, import slumped, while exportwas boosted by:
    • supply of materials to the nations in the war.
    • increase of export to Asian countries
    • increase of export to
    • historical record of trade surplus was 117 tons of gold;
    • Japanese foreign reserve become 387 tons of gold.The issue is not how to increase the overseas reserve, but how to utilize the overseas reserve.
  • 1916: Japanese foreign reserve 535 tons of gold.
  • 1917.2: Unlimited attack by German submarines; US
  • 1917.11: Russian Revolution
  • 1918: Naval blockade against Germany continued aftercease fire.
    • Loans to Czarist Russia became default. UK and France aimed to repay US loans by German reparation, trying to return to the Gold Standard soon.
    • Severe food shortage in Germany
    • German gold reserve: 810 tons “Starvation with gold coins in their mouths.”
  • 1919.5: Paris Peace Conference: mainly lead by David Lloyd George of UK, George Clemenceau of France, and Thomas Woodrow Wilson of US, but defeated nations were not allowed to attend.
  • 1919.6: US lifted the gold embargo (except Russia), returned to the Gold Standard. But, Japan did not follow to Gold Standard System.
  • 1920.1: League of Nations started (without US)
  • 1920.12: UK, embargo on Gold & Silver.
  • 1920: Japanese domestic reserve 837 tons exceeds that of overseas 796 tons.

2. Between World War I and II:


German Reserve of Gold & Foreign Currency held by Deutsche Reichsbank (1929-44)

German Reserve of Gold & Foreign Currency held by Reichsbank (1929-44)

The following chart shows how Germany sold all its reserves between 1931 and 1939.

German gold and FX reserves before and during WWII

German gold/FX reserves before WWII (a: holdings at end year, b: change vs. previous year) source

  • 1919.7: Weimar Republic; President Friedrich Erbert. The total amount of reparation was 300B Mark (=107,523 tons) required by UK & France. Initial payment by 1921.4 was 20B Mark (=7,168 tons) But German gold reserve was decreased to 402 tons in 1919. The reparation could by paid not only by gold currency but in kind such as vessel, coal, cattle, and timber.
  • 1921.1: Allied Powers’ concluded the total amount of reparation: 138B Mark (=49,460 tons) , with annual payment 2B Mark (=716 tons).
  • 1920: Hyper inflation in Germany more than a trillion times. 100T Mark note appeared.
  • 1924.4: US Daws Plan: 1B Mark (1924-25), 1.22B Mark (1925-26) and so on as tentative reparation.
  • 1924.11: Germany returned to Gold Standard: 1 Reichsmark = 358.31 mg)
  • 1929.1: US Young Plan: the remained total 3.58B Mark (=12,831 tons). Also BIS (Bank for International Settlements) was established.
  • 1929.10: US NY Stock Exchange clashed (the Great Depression)
  • 1930.5: Japan returned to Gold Standard.
  • 1930: World Trade decreased over the previous year: -19% (nominal) and -7% (apparent)


  1. 3. World War II and Transport of Gold:


  • 1936: Feb 26 Unsuccessful Coup d’etat in Japan;Japan-Germany Anti-Comintern Pact (1937 Italy joined)
  • 1937: Exchange Control Law in Japan;Japan-China War erupted.
  • 1937: US Neutrality Act, revised
    • BOJ report:Japan must increase the import of not only producer goods but consumer goods to keep expansion of heavy industry. As the export of Japanese light industries was getting less competitive, the export of heavy industry products seemed hopeless; enforcing delivery of gold bullion to maintain the exchange rate. BOJ estimated the possible deliverable gold bullion between 1937 -1941 will be 417 tons. (without breaking down of BOJ’s reserved 260 tons.)
    • Japan deteriorated Gold/yen evaluation from 0.75 g/yen to 0.29 g/yen.
    • Japan manipulated increase of apparent gold reserve by prior issuance of gold receipt bond.
  • 1938: upgraded to Japan-Germany-Italy Military Alliance: Japan assumed Soviet as a possible enemy, while Germany required to include the third nations (UK and France)
  • 1939.3.31 Gold Holdings:
    • UK 1777; France 2,666; Canada 191; UK-France Dominion 480; United Nations Total: 5,114 tons
    • vs. Germany 133 tons (+ Illegal seizure 500 tons?
    • Japan shipped Gold to US (1937-41): 608 tons (almost equivalent to 900B)
    • BOJ Gold reserve: 91 tons (1952), surprisingly small.
    • It sounds strange to deliver gold bullion to US to secure military purchase for the possible war against US.
  • 1939.7.26: US denounced US-Japan Commerce & Navigation Treaty
  • 1939.8.20: Nohmonhan Incident
  • 1939.8.23: German-Soviet Non-Aggression Pact concluded
  • 1939.9.1: Germany invaded Poland; World War II erupted in Europe.
  • 1939.9.17: Soviet invaded Poland.
  • 1940: Germany invaded France; Japan, Germany & Italy Tripartite Pact concluded.
  • 1941: US Lend-Lease Act concluded; Japan-Soviet Neutrality Pact concluded; Germany invaded Soviet Union; Japanese assets in US were frozen; Oil embargo on Japan.
  • >Top
  • 1942-44: Transportation by submarines between Japan & Germany (total 5 times); from Kure Naval Port, Hiroshima to Brest or Lorient Naval Port in occupied France, spending 90 days, submerged most of the day, surfaced in the midnight only. By this transportation, Japan received submarine dumb, radar, bomber pointer, torpedo boat engine in exchange for rubber, tin, tungsten, molybdenum.
    • 1942.4.11: Japanese submarine i-30 shipped Kure:On the way back from Singapore, it sunk by a mine
    • 1943.6.1: Japanese submarine i-8 shipped Kure:Succeeded return trip.
    • 1943.8: German submarine U511 arrived Kure:
    • 1943.10.13: Japanese submarine i-34 shipped Kure:Outward trip after Singapore, it sunk by British submarine attack.
    • 1943.11.5: Japanese submarine i-29 shipped Kure:On the way back from Singapore, it sunk by US submarine attack.
    • 1944.4.23: Japanese submarine i-52 shipped Singapore: Total crew126, delivering engineers to be trained in Germany, with 2 tons of gold bullion. Japanese cryptogram was decoded by US; the submarine was sunk by US carrier’s attack. This information was exposed in 1980 by US.
    • 1944.5: German submarine U512: Outward trip, it was sunk in the Atlantic ocean by US destroyer’s attack.
  • 1941 -1945: Earmarked Gold:
    • French Indochina: 33 tons
    • Thai: 44 tons
    • China: 53 tons
    • “Was it exceptional that a nation which is just being defeated has paid its war expenditure by gold bullion?” (from a history of Yokohama-Shokin Bank), or was Japan relieved from its debt by the enormous inflation?
  • 1945.10.1: Army of Occupation surprised the smallness of gold reserve at BOJ. Gold reserve: 91 tons (1952).

 4. The Bretton Woods System

  • 1944.7: Bretton Woods Conference: United Nations agreed the international monetary systems based on free trade.
  • 1945.11-1946.10: Nuremberg Tribunal
  • 1945.12: IMF (International Monetary Fund) and IBRD (International Bank for Reconstruction and Development) established. £1=$4.03
  • 1946.5-1948.11: International Military Tribunal for Far East (‘Tokyo Tribunal’)
  • 1947.5: Japanese constitution enforced.
  • 1949.4: Joseph. M. Dodge’s recommendation; $1=360
  • 1949.8: NATO established. (Greece and Turkey joined in 1952.2, and W-Germany joined in 1955.5)
  • 1949.9: BRD (BundesRepublik Deutschland) established; enforced its constitution (1949.5).
  • 1949.10: DDR (Deutsche Demokratische Republik) established; enforced its constitution (1949.10).
  • 1950.6 – 1953.7: Korean War; Japan enjoyed special procurement boom amounting $980M (871 tons)
  • 1950.7: EPU (European Payment Union) established; later reorganized into EMA (European Monetary Agreement)
  • 1951.6: GARIOA-EROA aid to Japan, and Marshall Plan to W-Europe ended.
  • 1952.4: Japan recovered independence (San Francisco Peace Treaty)
    • Japan confirmed to succeed the prewar foreign liabilities.13 kinds of £debts outstanding balance of£120M, 14 kinds of $ debts outstanding balance of $126M, and one kind of FFr debt outstanding balance of FFr437M.
  • US Gold Reserve (1945 – 1959) US Gold reserve; amounting 21,707 tons in 1949 maximally.

    US gold reserves between 1945 and 1959

    US gold reserves between 1945 and 1959

  • Period of High-growth economy:
  • 1952.5: Japan joined IMF and IBRD; paid-in capital $200M, 75% by yen and 25% by gold (15 tons)
  • 1952 – 1965: Introduction of foreign capital, amounting $860M (764 tons)
  • 1954: End of removal of reparations. But until then;
    • USSR: took from E-Germany $13B (11,552 tons)
    • The West Allies: took from W-Germany $517M (459 tons)
  • 1956.7: Japanese Economic White Paper said, “No more postwar”
  • 1957.3: EEC established by 6 countries.
  • 1958.10: France President Charles de Gaulle: Cinquieme Republique after Algerian war and 1/100 denomination in 1960.1.
  • 1960.7: Japanese Ikeda Cabinet: “Income-doubling program”
  • 1960: US dollar’s purchasing power declined about 40% of 1934.
  • 1961.2: W-Europe liberalized overseas travel, while Japan from 1964.4.
  • 1963.1: Paris-Bonn Axis (Elysee Treaty)

Gold Reserve of UK/France/W-Germany/Japan (1950-60):

  • Miracle economic recovery: West Germany showed 7.9% growth in 1950s, exceeding France in 1952, Japan in 1953, and UK in 1955 in terms of gold reserve. The main reason for this growth due to active export of producers’ goods to other European countries. German industry evacuated to escape from US bombing during the war. The damage ratio was estimated less than 20%.

Gold and currency reserves of UK, France, Germany, Japan between 1950 and 1969

  • 1963 – 69: Euro Dollar market grew from $5M (4,443 tons) in 1963 to $37.5M (33,325 tons) in 1969, mainly derived from excess of dollar, and unregulated from governments.
  • 1967.11: Pound crisis; £1=$2.40
  • 1968: Japan changed into the constant trade surplus trend from1968, attaining gold reserve 2,326 tons in 1968.
  • 1968.5: Paris Peace Conference to settle Vietnam war; agreed in 1973.1.
  • 1969: Japan became a supplier of funds into IBRD.
  • 1970.8: Oder-Neisse Line became border between Poland and E-Germany.
  • 1971.8.15: Nixon shock: suspended conversion between dollar and gold; for fear of decrease of gold reserve less than $10B calculated by official rate of conversion (=8,887 tons)
    • tried to maintain Gold Parity: $35/oz-t Au ($1,125/kg Au)
    • 1971.12 but US and France agreed new Gold Parity: $38/oz-t Au ($1,222/kg)
  • 1971.12 – 1973.3: New rate after G10 Smithsonian Agreement; returned to fixed exchange system with plus and minus 2.25% allowance. <Cf: Right column>
  • 1972.5: Return of Okinawa island to Japan; exchange rate 305
  • 1973.5: W-Germany and E-Germany joined UN.
  • 1973.3: Collapse of Smithsonian System: shifted to Dirty Floating Rate System

$1 =BFr 44.8159 11.57% down
=FFr 5.1157 8.57% down
=DM 3.2225 13.58% down
=L 581.5 7.48% down
= 308 16.88% down
=Fl 3.2447 11.57% down
=SFr 3.85 6.36% down
£1 =$ 2.6054 8.57% down
Au parity 1oz.t =$38 7.89% down

US/Swiss/W-Germany/Japan Gold Reserve & Foreign Currency Reserve (1955 – 1970):

  • The bottom figures show that the reserve of 4 major countries. Such reserve includes gold and foreign exchange, but not includes reserve tranche from IMF. However, US reserve was only gold by 1963, but includes foreign exchange after 1964. West Germany exceeded this reserve amount over US in 1970.


US/Swiss/W-Germany/Japan Gold Reserve & Foreign Currency (1955 – 1970):

US, Swiss, German, Japan Reserves 1955-1970

U.S., Swiss, German and Japanese Gold and Foreign Currency Reserves between 1955 and 1970

German Gold Reserves between 1952 and 2012

German gold reserves in Million ounces 1952-2012

5. Free Floating Currencies

  • 1973 – : Floating foreign exchange system; surge to Yen appreciation
    • 1973.2: US announced new Gold parity: $42.22/oz-t Au
    • Gold market: $86/oz-t Au ($27,650/kg)
  • 1973.2: First Oil Crisis arose:
  • 1973-74: Fourth Middle-East War (Yom Kippur War) erupted.
  • Yen exchange rate (1968 – 1997):The year average rates were around 200 by 1985, but showing higher yen & lower dollar since then.

    USD/JPY exchange rate

    USD/JPY exchange rate

  • 1976.6 – 1980.5: IMF reserve 4,665 tons; 1/6 (777 tons) was returned to the investor at the former parity, and another 1/6 was sold in the market.
  • 1979.1: Iranian Revolution. Ayatollah R. Khomeini returned.
  • 1979.3:EMS (European Monetary System) established; currency basket system (ECU) with 20% pooled gold and dollar reserve from members.
  • 1979: Second Oil Crisis
  • 1980-1988: Iran-Iraq War
  • 1980-1988: Reaganomics and higher dollar & lower yen.
  • 1981: Mexico; cumulative external debt problem, devaluating Peso by 41%.
  • 1985.9: Plaza accord aiming lower dollar: exchange intervention target: $1=DM2.5=200
  • 1986: Japanese lower central bank rate policy: trigger for bubble economy. World lowest bank rate 2.5% (1987.2), while US 5.5%, Swiss 3.5%, Germany 3%.
  • Bubble at World War I occurred at commodities trading, but this time was bubble at stock market and real estate.
  • 1989.11-12: Dismantling of the Berlin Wall; End of the Cold War declared.
  • 1990.8: Iraq invaded Kuwait. Gulf War (1991.1)
  • 1990.10: Reunification of Germany
  • 1991.12: Treaty on European Union (Maastricht Treaty);USSR disappeared and 11 CIS (Commonwealth of Independent States) established.
  • 1993.8: Japanese Hosokawa Coalition Cabinet
  • 1995: Japan full of difficulties:
    • 1995.1: Kobe earthquake
    • 1995.4: Historically higher yen $1=79; Orderly Reversal declared by G7 (Concerted intervention of buying dollar)
    • 1995.4: Collapse of Bubble economy
    • 1995.9: Historically lower bank rate 0.5%
  • 1995: Asian currencies maintained US dollar pegging system to keep lower yen and higher dollar to increase each export competitiveness.
  • 1997.11: Sanyo Securities, Hokkaido Takushoku Bank, Yamaichi Securities broken up.
  • 1997: SE-Asian currencies plunged:
    • Indonesian Rupia: -58%
    • Thai Baht: -45%
    • Malaysian dollar・ドル: -35%
    • Philippine Peso: -34%
    • Singapore Dollar: -17%
    • HK Dollar and Chinese Yuan maintained US dollar pegging system, asking US to buy yen and sell US dollar.
  • 1998.4: revised Bank of Japan Law revised, enhancing BOJ’s independence.
  • 1998.10: Russian Currency crisis, shifted to de facto floating system.
  • 1999.1: “Euro” introduced by 11 EU countries except UK, Sweden, Denmark, Greece; ECB (European Central Bank) established;
    • Price gap among countries became obvious due to the differences of tax, distribution cost, finance and employment policies.
    • Euroland 11 central banks’ reserves: Foreign currency 277B Euro, Gold 100B Euro (26.4%).
  • 1999.1: Brazilian Currency crisis, shifted to floating system.
  • >Top
  • Gold as the last resort:  After Nixon shock, theological argument still continues regarding future possibility of returning to fixed rate system and gold standard system.
  • 1974.12: US & France agreed to revaluate gold reserve by the market price: But developing countries solidly opposed, because US is gaining huge profit by the revaluation while is persuading demonetarization.
  • 1976-80: 1/6 of IMF deposited gold (777 tons) was sold back to the original investors by the former official rate ($42.22), and another 1/6 (777tons) was sold at the market price.
  • Gold Office Price vs. London Market Price (Ave.) per oz-t.(1968-86):
  • The above chart is the comparison of gold market price at London since dual price system in 1986. London market price is determined by quotations from 5 major traders like N.M. Rothschilds & Sons, Samuel Montague, etc. The drop in 1976 was due to the discharge of gold by IMF. (Cf: $332/oz-t as of 2003.4)
  • Gold reserve and its evaluation in major countries (1998.1):
  • The left scale is evaluation price (yellow bar) and the right scale is the volume of gold reserve (red line) of major countries in $/oz-t.
  • The above chart shows the total gold reserve of EU (even excluding 20% of the deposit to EMF) exceeds the total of US.
  • Gold mining cost is said about $260/oz-t.
  • There are two opinions about gold: “Demonetarization of gold” and “active user of gold.”






  • Gold has been a standard of currency backed by the Gold Standard System and the fixed office price of gold in most of 20c.
  • But since 1971 by the announcement of Nixon shock, conversion of dollar to gold has been suspended, and money flow rapidly grows exceeding real economy. Where has gone the creditability of currency?
  • In 21st century, three credit named GoldCurrency, and probably Ecomoney will sustain our global-local community.

Swiss Franc History, 2000-2007: The sale of Swiss gold reserves

Until the end of Bretton Woods, the Swiss managed to accumulate large gold reserves thanks to their Calvinist traditions and  a high savings rate. These high savings led continuous current account surpluses and big gold holdings at its Swiss National Bank (SNB). For years the Swiss and the SNB resisted the rather Keynesian mindset of the International Monetary Fund (IMF), and joined this institution only in 1992. The IMF membership implied that the Swiss had to change their constitution: until 1999 the franc was officially bound to gold. The gold reserves of the Swiss National Bank were historically regarded as the “property of the Swiss people” which could not be sold.

In a referendum in 1999, leaders managed to convince voters to remove the relevant constitutional article.1
In the 1990s the IMF intensified the “demonetization of gold” campaign and enforced the Washington agreement on gold in September 1999, a “gentlemen’s agreement among central banks of developed nations”:  During a period of weak inflation and strong U.S. growth, Central Bankers were of the strong belief that the strength of the anchor currencies of the global monetary system, the US dollar and the newly created euro, would be able to defeat any future supply-side and inflation issues. The central bankers reckoned that gold was a “barbarous relict” to hold gold. Even if officially independent of governments, central bankers suggested that government bonds were the better deal, because “bonds generate income“.

Washington Agreement on Gold Sales

Million oz
Currency Allocation since 1997 as 2013

SNB Distribution of Currencies, source SNB

The Bank of England quickly sold a big part of its gold before 2002, at the lowest prices under 400$ per ounce. The Swiss National Bank faced more political discussions, decided to distribute the gold sales over several years and sold gold under 500$ per ounce. Similar to the UK, the Swiss replaced gold primarily with such “income-generating” bonds denominated in the euro. Until 1997, however, the dollar served primarily to balance the SNB portfolio against its high gold holdings.

The euro countries, Germany, France and Italy, instead, decided to keep their big gold reserves, possibly to give the euro better credibility.


Gold price vs. SNB Gold reserves

Gold price vs. SNB Gold reserves

Since the last gold sales in 2007, the Swiss have maintained the same quantity of gold. Despite the strong rise of gold prices between 2008 and 2012, the SNB never bought more gold.

But people and central banks in China, Russia, India and other emerging markets purchased more. For more than one decade, the gold price improved with higher oil prices and rising incomes in those “barbarous” countries.  The gold price improved with higher oil prices and rising incomes and demand in those “barbarous” countries. Many central banks had capital gains on gold thanks to those rising incomes.



Gold sales at cheap prices propped up finances of Swiss cantons

Between 2001 and 2007, the SNB made the Swiss cantons happy and delivered some billions of francs to prop up their finances. The gains were unfortunately not caused by strong asset management capabilities, but mostly due to gold price improvements and gold sales at quite cheap prices.

Average price of Swiss gold sales: CHF 16,241 per kilo
Price of gold end 2012:
CHF 48,815 per kilo
CHF 32,573 per kilo
Opportunity costs of selling 1300 tons of Swiss gold: 42 Billion CHF
(source SNB 2005 and SNB 2012 results)

The official end of the initially agreed gold sales was in 2005. But in 2007 the gold price had risen even more and the Swiss decided to make some more “fiat money”  out of it. They sold another 250 tonnes (source SNB).

As the year 2010 SNB results show, the remaining Swiss gold holdings prevented higher losses. Unfortunately, the quantity of gold was less than half that in the year 2000; otherwise, gains on the gold price would have nearly neutralized losses on fiat currencies.

SNB results vs. profit on gold


Percentage of SNB gold holdings has fallen from 30% to 8%

For the proponents of the gold referendum that will be held in November 2014, the SNB gold sales were the destruction of what their parents and grandparents achieved during the Bretton Woods period. The percentage of gold holdings to total SNB balance sheet has fallen from 30% in the year 2000 to 10% in 2012 and 8% in 2014. The referendum initiative might oblige the SNB to increase the gold holdings to 20% again.

Ratio Gold to Balance Sheet  SNB


Change in Gold Holdings

The following presents the view of the Swiss National Bank, Philip Hildebrand, vice chairman of the SNB in 2005. At that moment most parts of the gold sales had happened.
SNB Gold Sales – Lessons and Experiences

The SNB seems to suggest here that Switzerland should only imports gold and not export it again. We know that Switzerland is an export-hub for gold to Asia.

Here direct access to the file, if the viewer should not work.

Historic references:

Already in the year 2000 Swiss television SRF anticipated the high gold demand by Chinese and Indians but it also claimed that gold is no longer need for central banks. Video in German.

<– Back to Swiss franc history overview
George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

  1. Already the introduction of floating exchange rates and the floating of the gold price reduced legal binding to this constitution article to a certain extend. The article was mostly reflected in a fixed gold price in the SNB balance sheet and in the obligation not to sell gold. Swiss National Bank History from 1957 to 1982, old constitution article of 1970 on page 413, comment page 123 []

Swiss Gold Referendum: Latest News, Parliamentary Speech Lukas Reimann

October 2014:

The “gold-friendly” Forbes interpreted the first poll results for the referendum as:

A slim majority of Swiss citizens said they would vote yes to force the Swiss National Bank to increase and hold on to their gold reserves, according to the country’s first opinion poll.

On Tuesday, 20 Minuten, Switzerland’s biggest daily newspaper, released the results of its online survey. According to the poll, which was conducted on Oct. 15 and had more than 13,000 respondents, 45% to 39% said they would support the “Save Our Gold” initiative. (Forbes)

Reuters, a part of the financial establishment, noted:

A proposal to prohibit the Swiss National Bank from selling any of its gold reserves has the support of 44 percent of the public, a closely watched survey showed on Friday, though that result falls short of the backing it needs to pass into law.

The group behind the opinion poll also said support was likely to diminish as a Nov. 30 vote on the measure approaches. (Reuters)

The source for both comes from the Swiss 20 Minuten.
That article actually concentrates on the Ecopop initiative, a second referendum that takes place at the same time. The left-wing Ecopop initiative wants to radically reduce immigration into Switzerland. The poll says that it would obtain 53% of the votes. Similar to Mauldin Economics, we judge that Switzerland is a business, not a country. For us as people living in Switzerland, the Ecopop referendum is more important than the gold referendum.  It has the potential to destroy the Swiss franc, our savings and the Swiss business model that is based on immigration of highly-qualified personnel. A win of the gold referendum with the implied breakdown of the EUR/CHF peg,  only means an income switch inside Switzerland. Namely from Swiss exporters and banks (that profit on the already weak franc) to Swiss households and wage earners that would see their purchasing power increase when CHF appreciates.

We also know that discussions around the two initiatives have not really started yet. Often initially undecided or uninformed people vote according to the mainstream. The mainstream, Swiss government and parliament are against both Ecopop and gold initiative.

Update August 2014:

The gold referendum will take place on November 30, 2014 here the link to one of Swiss canton’s website.

Tight monetary policy in the emerging markets  – high interest rates and somewhat rising unemployment in these countries – currently depress global inflation, the gold price and other commodities. This is also visible in the weak Brent oil price.  A bad moment to hold the gold referendum….


via Bloomberg.

Swiss parliamentarians urged rejection of a popular initiative that would curtail the Swiss National Bank (SNBN)’s independence by requiring it to hold a fixed portion of its assets in gold. Members of the Swiss parliament’s lower house voted 129 to 20 with 25 abstentions today against the plan, which demands that at least 20 percent of the central bank’s assets be in gold. It would also disallow the sale of any such holdings and require all SNB gold be held in Switzerland. No date for a national vote has yet been set. The government in November also recommended the initiative be opposed, saying it would impinge upon the SNB’s ability to conduct monetary policy. Parliament and the multi-party government issue recommendations on all national referendums as a matter of procedure.

Since the parliament does not want to accept the initiative, the people will need to vote in a referendum. The following video shows one main proponent of the initiative Lukas Reimann in the parliament defending the ideas of the gold referendum.

For the ones, who do not understand German, Ron Paul’s text on the Swiss gold referendum, represent Reimann’s ideas.

How the Swiss franc changed from a gold-backed currency to a euro and dollar-backed currency.

The gold share in Swiss currency reserves has fallen, from 30% in the year 2000 to 10% in 2012 and to 7.6% recently. If the gold referendum passes the popular vote, the gold share must be raised to 20%. According to the proponent this could be done selling a big part of the foreign currency reserves.

Ratio Gold to Balance Sheet  SNB

Graph thanks to @CoimbraAzevedo, now at BNP Paribas, who comments “What do You think when You see this chart? Hint: it’s a spherical viscoelastic film filled with gas.”

Gold-backed CHF vs. EUR USD backed

Most of the SNB holdings are German Bunds and US Treasuries. In a future inflationary environment, prices of German Bunds and US Treasuries will drop, especially when those central banks will start financial repression with negative real rates. ECB and Fed interest rates seem to be nailed to zero for years: There is no real carry trade that could help the SNB to sell the masses of euros and dollars.

On the other side, China has overtaken the U.S. as for GDP in purchasing power parities. China follows a monetary policy that is diametrically opposed to the United States. With high interest rates China combats inflation, financial repression and the potentially excessive desire of Chinese entrepreneurs to invest. At the same China fears the inflationary policy of the Fed and its own dependency on US Treasuries.




In favor of a no: SNB chairman Jordan, his speech in PDF format

Swiss Gold Referendum and SNB’s Opinion: An Exchange of Arguments 

The full details, Swiss Franc History: The SNB Sells a big part of the Swiss gold reserves at cheap prices.

Already in the year 2000 Swiss television SRF anticipated the high gold demand by Chinese and Indians. Video in German.

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.

Official Eurostat Trade Balance Massively Distorted by UK Sales Of 1464 Tonnes of Gold To Switzerland

Trade numbers by Swiss customs completely differ from Eurostat. The reaon: In 2013, private investors from the UK sold net (!) 1464 tons of physical gold (and similar) for a value 44.3 billion EUR. Those are (misleadingly) included in Eurostat trade figures but not in the Swiss ones.


Somebody who follows regularly the trade balance figures from Eurostat, may have noticed a sentence that was repeated in each monthly release from the Eurostat trade statistics since March 2013:

“The EU28 trade surplus increased significantly with Switzerland”

The final 2013 trade surplus for the EU28 was “+75.3bn euro in 2013 compared with + 27.6 bn in 2012″. We wondered why the number of 75 bn euro was nearly four times higher than the total Swiss trade surplus for 2012. There must have been massive consumer spending and imports to Switzerland that suddenly moved the traditionally high Swiss surplus into negative territory; or simply: data manipulation.

When we compared the Eurostat data with that of Swiss customs, we discovered a huge discrepancy in each monthly release. The trade numbers the Swiss officials delivered were completely different: it showed a Swiss deficit against the EU (aka “EU28″) of only 21.38 bn. CHF, about 18.5 bn euro, a number that was massively lower than the one reported by Eurostat. Switzerland usually has a big total trade surplus, but it imports energy from its European neighbors and many products and preliminary goods from Germany. For this reason it has a trade deficit with the EU, but a big total surplus.

Swiss Trade Balance 2013

Swiss Trade Balance 2013, source Swiss customs

Our suspicion was manipulation, something the Greek statistics bureau did until 2009 or the Chinese are supposed to do still today.

The solution to this mystery came only after I asked both Eurostat and Swiss customs.

Eurostat: Physical Gold Exports UK to Switzerland

Eurostat: Physical Gold Exports UK to Switzerland, source Eurostat

The key points

  • The Swiss do not include sales of physical gold in their trade statistics, Eurostat does.
  • In 2013, private investors from the UK sold net (!) 1464 tons of physical gold (and similar) for a value 44.3 billion EUR. This was 1 464 000 kilograms each at the current price of 30254€ per kilo.
  • Physical gold sales are caused by the liquidation physically-back gold ETF holdings in the UK. “They are being shipped from the U.K to Switzerland for refining into smaller one kilogram gold bars, as the Australian bank Macquarie said. These were then sent to Asia and bought by Asian investors.” (source The Market Oracle)
  • Asians buy gold for several reasons. One reason is the fear of inflation, given that prices still rise quickly in Asia. Europeans and Americans, however, focus on the de- and disflationary environment.
  • “There is also an increasing preference for allocated storage in Switzerland by high net worths and family offices. Switzerland still has much of the world’s gold refining capacity and remains a favourite destination of investors and savers concerned about sovereign risk” (again The Market Oracle)
  • The gold sales inflated the British exports recorded at Eurostat: it reduced the British trade deficit from 128 bn to 84 bn.EUR.
  • The temporary weakening of the Swiss franc in Spring 2013 can be (partially) explained by these big gold purchases, Swiss investors sold CHF to buy the gold from the British sellers. From summer on, the franc recovered; potentially because Asians had to sell dollars to buy the kilogram gold bars from the Swiss.


Our critique

Manipulation of the key economic indicator trade balance

The inclusion of physical gold in the Eurostat trade balance figures is a manipulation of the key economic indicator “trade balance” for many market participants.

  • The trade balance is similar to a profit and loss statement, just as any company would publish. It is the most important part of the current account.
    The international investment position is the sum of yearly changes in the current account.
  • If more goods are imported than exported then the trade balance is negative; people are consuming more than they produce. If investment income and changes in asset valuations are not able to offset this difference, the net international investment position and wealth is reduced.  Therefore the difference between exports and imports, the trade balance, is a measure of profitability of the country and of change in wealth.
  • Production and export of goods contained in the trade balance usually happens in the same year. As opposed to goods in the trade balance, physical gold (or a gold ETF) is often acquired many years before the sales.
  • The purchase price of the gold, however, is not considered in the Eurostat trade balance, unless acquired in the same year. For a commercial or a financial company the purchase price would be contained in the profit and loss statement, only the profit would be shown but not the full sales amount.

Including fire sales of gold in trade figures helps to raise confidence in Europe

Till now we have just looked at UK sales of physical gold. But it could also apply to the weak European member states (to be verified). People in these countries were possibly forced to sell their gold for economic reasons. Selling the gold would increase their trade surplus at Eurostat and thanks to a higher surplus, investor confidence in the euro zone would improve.

Similarly, it needs to be verified if the “great improvements” in the U.S. trade balance are related to such fire sales of gold acquired many years ago or via the liquidation of gold ETFs registered in the U.S. It is already well known that the weakening of Asian trade balances is partially caused by big gold purchases; the Indian government has been trying to stop these purchases for years.


Gold is money and has nothing to do with the trade balance

Moreover, it is misleading to mix physical gold with items like machines or fruit. Gold is a mean of exchange, just like currency has become (as a substitute for physical gold); gold is money.

Eurostat excludes the sales of gold ETFs from the trade balance, and certainly it excludes the sales of currency, the exchange of fiat money. Including money (aka gold) against money (aka currency) in a trade balance is as misleading as including spot exchange of dollars against euros.


Read also:

Switzerland releases detailed trade statistics for gold, which is published outside of the trade balance.


George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.


How Long Will the Dollar Be the Major World Reserve Currency? A Look at Wealth

We examine how long the U.S. Dollar will remain the unique world reserve currency. The most important criterion for being a reserve currency is wealth. While China has recently overtaken the U.S. as for GDP, in the next 10 years it will overtake the U.S. as for wealth.


Debt Sterling as World ReserveAfter WWI the British pound lost its status as world reserve currency, the United States became by far the richest nation in the world as for wealth. An ECB  researcher shows how a rapid debt increase during WWI ended sterling’s status as the world reserve currency.

The U.S. Dollar became the major and nearly unique world reserve currency. With the abolishment of the gold standard in the early 1930s and the creation of the dollar-centric Bretton Woods system in 1945, its status became even more important.

To know how long the dollar will remain the major  world reserve currency, one important criterion to look at is wealth and to see how long the United States remains the richest nation in the world. The best indicator is the world bank’s gross savings rate. Gross savings is the gross national income minus consumption + transfer payments like pensions. Accumulated savings over years give wealth. China has a gross savings rate of 51% of GDP and the U.S. has one of 17%, while for comparison Germany is 24% and the rest of the euro zone is around 19%. These values have been pretty stable for China and Germany for years. Since the 2008 crisis, Americans are saving a bit more.


United States household net worth 1952-2012

Click on image to expand, US household net worth 1952-2012

Wealth consists of assets, either in the form of fixed (machines, homes, state investments, infrastructure) or financial investments, either the ones of the private sector or the ones of the state, like state pensions.

Recently China’s GDP has achieved the same level as U.S. GDP as for purchasing power (things are cheaper in China); but on the other side, China’s GDP is rising far more quickly.

We ignore these subtleties and assume that:

China GDP = US GDP 

Chinese wealth increases each year by 34% of US GDP more than US wealth. These 34% of GDP are about 40% of US disposable income. Disposable income is typically a bit less than GDP due to depreciation and tax.


Private Wealth vs. Government Wealth 1970-2010 Picketty Germany UK US Italy Canada Australia Japan

click on image to expand , source Prof. Picketty, University of Paris

Currently, US private net wealth is about 500% or 550% of disposable income, depending on stock market and home price fluctuations (and the Fed). This number does not include wealth in the form of state investments and infrastructure.

But Piketty shows that for the public sector:

Net wealth = investment + infrastructure minus debt and for Western states it is around zero 

China had a very weak GDP and low wealth when it started the recovery against the US in the 1990s; therefore, it makes sense to say that Chinese wealth is currently around 200% of US GDP.

Hence it appears that in less than ten years time, China will have overtaken the U.S. not only as for GDP but also for wealth.

Still important things like convertibility of the Yuan and a big choice of investment vehicles are missing in China, but this could be achieved in the following ten years.


In the following paper, Eichengreen, Chitu and Mehl show that “financial deepening” and wealth is the most important driver of a reserve currency.

Chiţu, L, B Eichengreen and A Mehl, “When Did the US Dollar Overtake Sterling as the Leading International Currency? Evidence from the Bond Markets”, Journal of Development Economics, forthcoming and VoxEU, Online Link 

Read also:

The following post also examines different criteria than wealth: When Will the Renminbi Become a Reserve Currency?

B. Eichengreen, Mehl, A., Chitu, L:  “One or multiple international currencies? Evidence from the history of the oil market”, VoxEU, Online link

George Dorgan,

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.





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SNB CHF Blog: A beleaguered central bank in the dangerous world of global macro and euro crisis

SNB CHF Blog: An economic encyclopedia on the Swiss safe-haven and its central bank written by an association of independent financial advisers.

Swiss Price Inflation: HICP: -0.1% y/y CPI 0.0% Avg. Yearly Money Inflation (M3) 8.1% y/y, Avg. Yearly Credit Inflation 3.9%
Other HICPs Y/Y: Eurozone 1.1 0.9, 0.7,0.5 0.4% 0.3%  France: 1.0 0.8 0.8 06 0.5%  0.4% Italy: 1.2 0.8 0.7, 0.5  0.4 0.2 0.1 -0.1%, Spain: 0.5 0.3, 0.2, 0.0 -0.3% Germany:1.4% 1.3% 1.2%1.1%0.6% +0.8% (sources,  Eurostat and


Our Core Thesis: European leaders have successfully implemented austerity, disallowed notorious wage increases in the periphery and nearly introduced deflation. Inflation differences between the euro zone and Switzerland will decrease to zero, Swiss CPI inflation might even be higher in some years. The CHF real eff. FX rate overvaluation talk disregards completely the continuous immigration into Switzerland. Therefore EUR/CHF will remain close to 1.20. Risk-off flows will not leave Switzerland, but they will be converted into risk-on flows (stocks and real estate) thanks to immigration, higher Swiss GDP growth and relatively weak Swiss wage hikes. In particular, in the housing sector these flows will build up wrong resource allocations. In some years stronger global growth and high German wage increases will boost inflation in Germany and partially in Switzerland but Southern Europe will still struggle. By tradition, Germans will move funds into Switzerland in order to protect them from inflation and the ECB. At that moment the SNB will need to hike interest rates - before or in line with the ECB. The Swiss "Soros moment" will arrive and the EUR/CHF will fall under 1.20. The consequence for monetary policy will be:
  1. Either the SNB fights inflation and the Swiss real estate bubble, allows a CHF appreciation and sells reserves below the price of EUR/CHF 1.20 or
  2. Switzerland accepts higher inflation and consequently gives up its competitive advantage in lower inflation and lower borrowing rates. The latter scenario was excluded by the SNB's Thomas Jordan already in 1999 when he pledged against a euro membership. The SNB mandate explicitly disallows inflation.
The first scenario, namely that the SNB sells reserves below EUR/CHF 1.20 is therefore the only feasible solution. Whether the SNB suffers a big loss depends on the income it can generate in the meantime. In regular posts we show how the Swiss CPI comes closer and closer to euro zone inflation. One day, maybe in 10 or 20 years, the Swiss franc will depreciate more strongly, but this will be only after the bust of the Swiss real estate bubble.


Permanent link to this article:

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