Gold came under further selling pressure, weighed by renewed buoyancy in global stocks. The Dollar Index also hit new highs for the week, but remains confined to last week’s range.
Stocks surged, lead by Europe, where PMI data posted surprising gains. While the initial reaction was positive for shares, the uptick in business activity is largely a result of price cuts. However, the very thing that is keeping these businesses chugging-along, is also adding to the deflationary pressures that the ECB fears the most.
At some point, purchases slow as buyers delay those purchases in anticipation of lower prices tomorrow. This in turn prompts the central banks to push back ever-harder in an effort to generate the inflation they so desperately desire; by further debasing their currencies.
The upcoming Swiss gold referendum is starting to get more press, as at least some in Switzerland would like to see the debasement of the franc halted. As Egon von Greyerz pointed out in an article early in October, the SNB has expanded the monetary base from CHF100 bln to CHF500 bln since 2008 to try and keep the franc weak.
And here’s a fact from Mr. von Greyerz that you may not realize: “CHF 400 Billion is around 2/3 of GDP. This means that Switzerland has printed more money, relatively, than any major country in the world in the last 6 years.” The Fed would have to nearly triple its balance sheet from the present $4 trillion level to be as profligate!
The Swiss franc was long considered a sound currency, a true safe-haven, which benefited the Swiss economy (primarily banking) greatly. Some of the Swiss have apparently grown nostalgic for the ‘good-old-days’ when the wasn’t subject to constant debasement at the hands of central bankers.
If the measure passes on 30-Nov the SNB will have to repatriate its gold reserves held overseas and bring those gold holdings up to 20% of total reserves. The SNB’s gold reserves are presently less than 8% of total reserves, meaning the central bank would have to go on a buying spree to accumulate an additional 1,500 tonnes of gold over the next five-years.
According to Reuters, “a “Yes” vote – which is possible but not likely, polls suggest – would probably send gold prices rocketing.” A poll that I saw earlier this week showed proponents with a slight edge, but within the margin of error.
Not surprisingly, the Swiss government are adamantly opposed to the measure, claiming it will hinder their ability to affect monetary policy. Translated, that means it will hinder their ability to further debase the franc.
Certainly a ‘yes’ vote would render the 1.20 ceiling against the euro untenable. In fact, since most of the SNB’s current reserves are held in euros, they would likely be selling euros to buy gold.
If the ECB were devious, they would be surreptitiously funding pro-referendum efforts in Switzerland. Several million in political ads might go much further toward weakening the euro than trillions in QE ever would.