If a central bank looks like it might be a major buyer of something, should you be a buyer of it too? Of course you should.
If we have learnt anything from the last six years it is that buying what the Fed, the Bank of England and the Bank of Japan are buying is the way to make money.
They buy, you buy, prices rise.
Hold that thought while we look to the Swiss gold referendum on Sunday.
The Swiss are partial to referendums. But this one will be of particular interest to MoneyWeek readers.
Why? Because it’s all about gold…
The Swiss gold referendum could put a permanent floor under the gold price
On Sunday, the population of Switzerland will decide whether they want their central bank – the Swiss National Bank (SNB) – to abide by the following rules.
It would be prevented from selling any of its gold reserves. It would have to store all those gold reserves actually in Switzerland (at the moment only about 70% is there). And it would have to make sure that at least 20% of its assets are held in gold.
Right now less than 8% of the SNB’s assets are held in gold. So raising that to 20% would mean the SNB would have to either sell some of its foreign currency reserves (to increase the proportion of its reserves held on gold), or buy a large amount of gold in pretty short order.
It would be highly unlikely to go for the former option, because this would lead the Swiss franc to strengthen, and kick off a nasty deflationary crisis as a result. (One of the reasons that the percentage of the SNB’s assets held in gold has fallen as low as 8% is because Switzerland has been frantically printing francs and using them to buy other currencies in an effort to prevent the franc from rising.)
The upshot is that if Switzerland votes ‘yes’, the SNB will buy gold over a five-year period. The gold price is likely to jump as a result – by 18%, suggests the Bank of America.
Better still for holders of gold, every time the price of gold fell after that, the SNB would have to buy more to keep their gold reserves at 20%. That would put a partial but permanent floor under the gold price.
So again, anyone buying what the central bankers buy will do very nicely indeed. (If you’re a MoneyWeek subscriber, you can read more on the details of the Swiss gold referendum in our recent briefing on the topic.)
Even if the Swiss vote ‘no’, this is good for gold
Now, the reality is that the Swiss probably won’t vote ‘yes’. A hardcore of gold bugs likes to think that there will be a ‘shock’ when the votes are counted.
But as is often the way with referendums (see Scotland!), the authorities have been out campaigning in the wake of a poll suggesting that a ‘yes’ vote was possible. An aggressive media effort from the SNB seems to have worked in pushing down support for the ‘Save our Swiss Gold’ initiative. The most recent poll showed 38% in favour, 47% against, and 15% undecided.
But the very fact that there has been enough momentum behind the idea to get it this far – and that 38% of the voting population say they will vote ‘yes’ – matters. It’s a reminder that a large part of the populations of countries with money-printing banks aren’t comfortable with the experimental nature of modern monetary policy (which boils down to printing more money every time there is a hint of deflation).
The SNB claims that the obligation to hold gold would remove its flexibility to create money as and when it likes (because they’d have to buy more gold whenever they did). But that’s exactly what the Swiss behind the campaign want.
They don’t like the fact that central bankers have effectively become more powerful than politicians. And they don’t believe that central bankers are any more capable today than they have been in the past of figuring out exactly how much money should be available in any one economy at any one time. So they want to use the gold initiative to prevent them trying.
They aren’t alone in their concerns. If the US had a referendum system similar to that in Switzerland, my bet is that you would see something similar happening there – Republican senator Rand Paul is famously keen on a new gold standard, for example.
Those concerns also aren’t likely to go away on the back of a ‘no’ vote. Remember how a mere 38% of the adult population voted ‘yes’ in the Scottish referendum? They haven’t gone away – if anything, they are more angry and more dedicated to their cause than ever (watch out for the Smith Commission report today – it is likely to offer independence by the back door).
The Swiss referendum is just one manifestation of voter dissatisfaction with politics in the developed world. There are more to come, whichever way this vote goes. For more on the consequences of this for markets (and for the gold price) see our cover story and letter in this week’s MoneyWeek magazine – out tomorrow. (Get your first four issues free here if you’re not already a subscriber).
And just before I go – a date for your diary
You might well remember, earlier in the summer we held the first ever MoneyWeek Cruise for investors.
It was a fantastic event. As one guest wrote to tell us afterwards: “It was a great experience in every way. The individual presentations were very informative and the social events stimulating and enjoyable. You can count on me as a participant on the next cruise!”
And the good news is, it wasn’t a one off. We’ve just finalised the details of the next cruise, and it’s going to be a great trip. It’s going to be from 2-11 October, 2015.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.