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Gold & The Swiss National Bank.

  • Written by Syndicated Publisher 64 Comments64 Comments Comments
    August 17, 2011

    Gold has a nice bid so far today. There are so many reasons to own gold. I think a factor in today’s price action is the Swiss National Bank. This is a slow motion breaking story. There should be a resolution on central issues the SNB is now pondering in the next 24 hours. Depending on the out come it would a) justify the gold pop today and b) set the stage for another big leg up in AU.

    All of the Swiss newspapers have the same story. The SNB is “actively” contemplating a currency peg against the Euro. I find this information to be bizarre. Over many years of watching the Franc and the SNB I have never seen anything like this before.

    Apparently the SNB is reaching out to all sectors of the Swiss economy and politics to obtain “Consent” to implementing the Peg Policy (“PP”). That’s a very unusual way to conduct monetary policy in any country. It’s especially true for the Swiss.

    The reason that the SNB is ducking responsibility by getting an unofficial “Okay” from the business and political leaders is thatthere is a very big risk for the Swiss to undertake a PP. 

    The Swiss aren’t stupid. The reason that the public result of the PP deliberations is being deferred until tomorrow is that they are waiting for the Merkel/Sarkozy meeting to end. There is some(small) possibility that the meeting will result in a “Nein” by Germany for a broad program to save the EU. The Swiss could not afford to set a Peg on Tuesday morning when there was some risk that a major negative step within the EU would occur a few hours later.

    This is just whacky to me. A major historical step in Swiss monetary policy is dependent on a meeting earlier in the day?Have things evolved such that global monetary policy is changing on a day to day basis? It sure looks that way to me.Where could this go?

    My GUESS is that the M/S meeting today will be happy talk about long-term budget discipline and a reaffirmation to deal decisively(Not really) with the problems with bigger (But not big enough) band aides. I’m of the opinion that outcome is pretty priced in. I don’t think we will see an announcement that there would be a newlarge (Starts @ Euro 2 trillion) ) pan European debt offering to take pressure off of Spain and Italy. I also don’t see Germany/France folding the tent on the Euro experiment.

    IF that is the result then it substantially increases the probability that a Swiss Peg is announced. (That would not be the case in the (unlikely) Nein/Non scenario.

    What happens if there were to be a peg? Two shorter-term outcomes that I can think of:

    I) The CHF is the “go to” safe have. But not if they peg themselves to the Euro. Some of the money that is currently parked LONG TERM in Switzerland will leave. (I think a lot of the short term hot money has found the exit by now). Where will those long term seekers of of a safe haven go, now that it ain’t so safe? There is only one option, gold. That is especially true for those who have Swiss Francs in the first place. They all love gold.Now they will have to love it more.

    II) The next time there is a crisis on the table where will the money go? Not the Swissie. That would be a dead end. So the rest of the hot money will have less of a place to go. Once again it points to gold.

    The “next time” I refer to is likely to happen by Friday. We are living day to day.

    For the record

    I want to say that should the SNB choose to set up a Peg it will not work. It will end with a staggering explosion. I can’t see a “solution” in Europe. Germany will not “Federalize” the debts of the peripheral states. Therefore the problems will not go away. The risks to Italy and France will grow as a result. As that happens, capital will have to move in the direction of Switzerland. That is always how this has worked in Europe.  The SNB may buy some time with their Peg and force scared money into gold. But sooner or later the money will flow to Switzerland. This is especially true given that the SNB will be subsidizing the price of the Franc for that hot money.

    Should we go down that  road the SNB could be forced to absorb 300 billion Euros. The losses on those holding could be staggering for a small economy like Switzerland. In a recent blog I suggested:


    The Swiss like to “Double Down”

    A Peg would be the biggest double down in financial history.


    Bruce Krasting: Gold and the SNB.

    Images: Flickr (licence/attribution)

    About The Author – Bruce Krasting

    I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.