Why did SNB sell gold at cheapest prices? Stupidity?

To find further explanations as to why the gold price was weak in the late 1990s we analyzed sector balances. Effectively private spending and private debt went in two different directions: a heavy increase in private spending and debt in the US against less growth in private spending and less debt in the rest of world. This fostered GDP growth in the US and weakened it in other countries. Real interest rates were positive. Markets thought that the debt-financed growth could continue for years; they created the dot com bubble on top of it that strengthened technology stocks and the related currency, the dollar. This rare combination led to excessively weak oil and gold prices.

We extend this thinking and want to know why the Swiss National Bank (SNB) was ready to sell gold at historically low prices.

Please first read why the gold price so low in 1999/2000.

 Why did SNB sell all that gold at cheapest prices? Stupidity?

Similar to the Bank of England, the Swiss National Bank (SNB) sold gold at the cheapest prices. In 1999/2000, the central bank argued it had “excessive reserve assets.”




Walter Hirt’s Petition in 2002

In 2002, the Swiss gold and monetary expert Walter Hirt raised a petition to the Swiss government to stop the gold sales. He argued that US growth during that period was mostly based on private “debt orgies”, while gold was free of solvency risks and far from a barbarous metal. Solvency would not decrease for bonds, but for the foreign currencies of the USD and EUR, in particular. According to the International Bank of Settlement and Alan Greenspan, the systemic risk had increased.

His main arguments were that with each gram of gold that the SNB sold, it weakened its assets and the solvency of the Swiss franc and the status of Switzerland, because as the part of the bonds threatened with solvency risk increases, the more and more the SNB reserves become “paper-like”.

  • Mit jedem Gramm Gold, das die SNB verkauft, schwächt sie die Aktivseite und damit die Bonität des Schweizer Frankens sowie den traditionell angesehenen Status der Schweiz, weil der Anteil der bonitätsabhängig sich entwertenden Anlagen immer grösser und«papierener» wird.


A central bank should primarily look after the safety of its currency, the solvency of it currency and to chase yields on investments. Gold should therefore have a higher importance, in particular because of the rapidly deterioration of public and private finances.

  • Da eine Notenbank in erster Linie auf die Sicherheit ihrer Währung und damit auch auf die Bonität ihrer Reserven zu achten und nicht eine gewinnorientierte Politik zu verfolgen hat, erhält das Gold wegen der weltweiten Verluderung der Finanzen und der massiv zunehmenden Probleme in der Finanz-Industrie ein grösseres Gewicht.

Gold should not be sold at all, in particular after the experience with the Swiss public pension funds (German: AHV). If the SNB effectively possesses too many reserves, then one should define the term “Excessive Reserve Assets”. Moreover, the SNB would be better to sell currency reserves  [and not gold reserves], because those most often do not achieve capital gains.


  • Sollte die SNB tatsächlich mit zu vielen Reserven gepolstert sein, wäre der Begriff «überschüssige Währungsreserven» zu definieren, so dass sich die Trennung von einem Teil der Devisen-Reserven anbieten würde. Dies scheint deshalb eine heikle Frage zu sein, weil auf diesen Positionen kaum aufgelaufene Buchgewinne realisierbar sind.


But the SNB and Swiss government did not have open ears for Hirt’s arguments.

SNB chief economist Georg Rich was not able to respond to Walter Hirt. Rich admitted to not understand gold price movements and how to determine the right level of reserve assets for the the SNB, as well as for other central banks. Potentially the SNB simply wanted to get rid of the yellow metal that had seen steady real price declines until 1999/2000. We must excuse Rich to a certain extent: at the time, most of the modern research about sector balances was not really available. Still, in 2013, Fed chair Yellen was said to be ignorant about gold prices (source Natixis).

Natixis, us and many others understand more today. Sector balances, as reflected in hey largely reflect the works of heterodox economists. This is one additional method to understand the gold price.

From 1999/2000 onwards, even the monetary policy of the conservative Swiss was based on pure and simple price inflation targeting. Monetary aggregates, credit growth became a subordinated element of monetary policy.


High Swiss household savings rate and immigration should further strengthen the franc

Swiss household savings rates are, at 13%, notoriously higher than the ones in the US with values under 5%, and sometimes less than zero.  Modern heterodox approaches also explain why the SNB must help to increase the purchasing power of the Swiss household sector so that they can spend more, save less and help to create jobs in their neighbouring countries of the euro zone.

This implies an exit from the cap of the Swiss franc.

The old-fashioned Keynesian view, however, that  Switzerland is confronting a deflationary spiral, is the biggest absurdity I have ever heard. The Swiss SMI is at a record-high, companies sit on record-profits and Switzerland has near record current account surpluses. Swiss wealth, partially inflated by SNB money printing, increases by 5% per year . Based on Pettis’ ideas, we argue that the SNB needs to wait for inflation, before it moves out of the peg. This will further increase the already high savings rate of the Swiss private sector.  When things get more expensive, then households will spend less, which is perfectly visible in Russia and Japan at the moment.


Will the SNB buy gold, even if the referendum does not succeed?

Effectively the SNB has never excluded the possibility of buying more gold, but would not like to be forced to do this in the next five years, as the Swiss gold initiative requires.

I can imagine that the SNB will buy gold at levels around 1000$ and increase its gold share anyway. I reckon that a reduction in the massive Swiss money supply expansion and the need to end the CHF cap immediately is more important than early gold purchases.


Evarist Lefeuvre, Chief Economist of Natixis America at the LBMA conference 2014: Triple Digit Gold?

Walter Hirt (2002): Petition an den Bundesrat, “Die Goldverkäufe der SNB sind sofort einzustellen

G. Dorgan (post will be continuously updated): The Six Major Fundamental Factors that Determine Gold and Silver Prices

G. Dorgan (2014): FX Rates, Contrarian Investments and the Misleading Concept Called GDP


G. Dorgan (post continuously updated) The History of the Swiss Franc, Episode 5, 2000-2007: The sale of the Swiss gold reserves



George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
See more for 6a.) Swiss Gold Referendum

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