In a referendum, the Swiss had to decide about:
1) Ecopop, an ecological-political movement that wants to limit (net) immigration to 0.2% of the population.
2) Abolishment of tax advantages for rich foreigners.
3) A gold initiative.
All three initiatives were rejected, the gold initiative by 78%.
George Dorgan summarizes the outcome. He explains what it means for gold, CHF and the SNB. He argues that the next economic cycle will be driven by stronger wage growth in Germany and in the United States. He argues that in some years time the major enemy of the SNB will become inflation that is caused by rising Swiss asset prices and rents and from inflation spill-overs from Germany and the U.S.
The SNB will continue to do FX interventions. But finally it will react according to the proposal raised by Prof. Janssen, a major supporter of the gold initiative: with a managed currency appreciation.
(see also version on Seeking Alpha, published just after the referendum)
The Swiss had to cast their ballots on three popular referendum initiatives:
- An ecological-political movement (“in short form called Ecopop“) that wants to limit net immigration to 0.2% of the population: a number that is far lower than that already approved by the “vote against mass immigration”. Bloomberg speaks of the biggest risk for Swiss business, because this drastic reduction of immigration would cut the output of Switzerland’s big businesses.
The proponents even argue that “too much wealth makes sick” and the Switzerland should limit (GDP and population) growth. Otherwise Switzerland would explode from 9 to 12 million inhabitants, they would prefer the status quo. They explain the initiative in a simple picture:
2. Abolish tax advantages for rich foreigners that are currently taxed on living costs but not based on income or wealth. Some Swiss cantons have tried to attract such wealthy tax-payers, and Michael Schumacher is maybe the most prominent example. The wealthy create more demand for high-quality real estate and are accused of driving prices up. The cantons situated in the mountains (e.g. St. Moritz) are however dependent on their money.
3. The gold initiative.
Members of the Swiss People’s Party want to “Save Swiss Gold” to give more credibility to the SNB’s monetary policy and the Swiss Franc. The initiative would require that the SNB;
- Does not sell any more of it’s gold reserves
- Must not let gold reserves fall below 20%
- Must hold all gold reserves in Switzerland
If the vote is “yes” the SNB has;
- 2 years to repatriate it’s gold reserves
- 5 years to reach the 20% reserve level (via ForexLive)
This would mean that Switzerland would have to buy around 1500 or 1600 tons of gold over 5 years, either with newly printed Swiss francs or with the proceeds of selling euros and dollars. In the latter case the SNB would have to exit the euro peg.
Ecopop got rejected with 74% of votes, the gold initiative with 77%, the abolishment of tax advantages by 59%. The following shows the Swiss map and the outcome for the gold referendum by canton. None of them are in favor of it. The gold initiative obtained only 22.7% of the votes.
Reimann: “We lost, we have to accept that. People’s verdict must always be respected. But you haven’t heard last of us” #swissgoldreferendum
— Swiss Gold Vote (@swissgoldvote) December 1, 2014
— Swiss Gold Vote (@swissgoldvote) December 1, 2014
Both Ecopop and the gold referendum were important for the Swiss franc, the SNB and, to a very limited extent, for the gold price.
1) If both Ecopop and the gold referendum had won, this would have been positive for CHF (FXF) and gold (GLD) in the short term, but negative for CHF in the long-term. The SNB would have been able to sell most reserves possibly above EUR 1.20 in the long-term.
Reason: Ecopop wants to restrict the immigration to Switzerland to 0.2% of the population. This would have increased wages and inflation, but reduced competitiveness of Swiss firms and it would have weakened the Swiss Franc.
It would have been a repetition of history. With the economic crisis in 1975/1976 immigrants had to leave Switzerland. Consequently, the country had strong inflation in the early 1980s. In 1982 former SNB chairman Leutwiler deeply regretted the DEM/CHF floor of 1979.
2) If Ecopop had won and the gold referendum lost, then we would have expected the same long-term picture, but in the short-term the SNB would not have had problems.
3) If only the gold referendum had won, then the SNB would have had immediate and long-term problems with its balance sheet.
4) Finally the effective outcome: Ecopop lost and the gold referendum lost.
Consequences for Switzerland :
- Thanks to the competition of highly qualified immigrants, increases in wages and inflation will remain low. This will enhance the margins of Swiss multi-nationals (EWL) and raise GDP.
According to Swiss statistics, employment levels rose by 0.7% y/y in Q3/2014, while Ecopop wanted to limit immigration (and implicitly employment growth) to 0.2%. The approved referendum against mass immigration (Feb 2014) should result in levels of +0.5% to +1% net immigration and employment growth per year.
The period of excessive immigration and job creation between 2009 and 2012 with 1.5% to 2% more jobs per year, however, is finished. Bear in mind that natural population increases in Switzerland are near zero, while they are higher than zero in the U.S.
- Swiss asset and real estate prices will continue to rise for many years (more here).
- Higher real estate prices have not translated yet into price inflation. Rents have gone up by 1% to 1.5% per year since 2008, far less than the yearly 5% increases in home prices. The reason is that regulation couples existing rents to SNB interest rates. Once the central bank hikes rates, then rents will reflect the real estate bubble more.
- The combination of future labor shortages and higher rents might lead to a dangerous price spiral, similar to the early 1980s or late 1990s when the housing market collapsed.
- The SNB will further blow up its balance sheet because foreign investors will buy Swiss stocks and real estate to a greater extent than Swiss residents will purchase foreign assets. The SNB will counter this effect with FX intervention.
- FX speculators will help the central bank in the short-term so that interventions will be limited. On Sunday, the central bank appealed to FX traders to buy the EUR/CHF with the usual “committed to buy foreign currency in unlimited quantities” .
Mike Paterson from Forexlive.com confirms “The world and his Mum are long of EURCHF. ” But the magic SNB spells will fail.Serious investors will come in and buy Swiss stocks denominated in CHF, at the latest with US trading. Gains for Euro long speculators will be destroyed again sooner or later.
- Any major deterioration in the economic situation in the United States will lead to another heavy assault on the SNB. However, we do not expect this in the next five years.
- One day the SNB will follow the proposal raised by Prof. Janssen, a major supporter of the gold initiative: with a managed currency appreciation or a crawling peg. The fixed peg to the euro will end, but the question remains when this happens. High wage inflation in Germany shows that this point might not be so far away. This spill-over into rising import prices for food is already visible.
- See the long-term picture in our core thesis. With the referendum, nothing changed to it. The managed currency appreciation combined with continuous immigration of qualified personnel is not uncommon. It is a perfect repetition of the Singapore case, a country that let immigrate the best talents from different Asian countries.
- We do not agree with arguments that SNB purchases of gold would have had a significant influence on prices. There are far too many other factors that decide about gold prices, but not a single small central bank. SNB’s gold sales during the early 2000 were accompanied by steady gold price increases. In the aftermath of the lost gold referendum, the yellow metal started a great recovery based on far more relevant US economic data (weak Black Friday sales) and speculation about low Fed rates for longer.
- As opposed to CHF, there are no gold-denominated stocks, gold does not have a country. Gold prices typically improve when wages rise more than company profits. Gold is the proxy for wealth distribution to wage earners, which is a major driver of inflation. This distribution happened in the US and Europe in the 1970s. It also took place in Emerging Markets until 2013: wages went up by more 5% per year and helped to boost global GDP, until it considerably slowed with Fed’s tapering.
Referendum outcome will not have a big influence on EUR/CHF
We expect a repetition of what happened after the latest poll.
Traders thought that the recent CHF strength was caused by the gold referendum, because mainstream news published such misinformation.
Some traded based on the leak of the poll results. Once the global macro algos from the big US banks and hedge funds started running, EUR/CHF fell again to the level it should be, based on fundamentals and SNB manipulation: namely to levels close to 1.20
It will not be much different this time.
We remain more optimistic on Swiss stocks . Curreny manipulation and lower wage inflation will help Swiss companies to achieve better margins than German (EWG) or American stocks.
Four fronts in the Swiss gold referendum (in German)
In favor of a no: SNB chairman Jordan, his speech in PDF format.
The full details, Swiss Franc History: the SNB sells a big part of the Swiss gold reserves at cheap prices.
Latest Referendum in February 2014: Swiss Yes to Referendum Against Mass Immigration is a Yes to Higher Salaries and Higher Inflation
Already in the year 2000, Swiss television SRF anticipated the high gold demand by China and India. Video in German.