Sell the Franc, Buy Gold

“Forceful relaxation” – it brings to mind a trader at a Mexican beach resort, not Swiss monetary policy, but that is exactly what the Swiss National Bank (SNB) announced in its Monetary Policy Assessment Wednesday, joining a growing chorus of central banks engaging in quantitative easing. Sell the franc and buy gold.

The SNB cut its target range for three-month Libor by 25 basis points to a range of 0–0.75% and announced plans to purchase domestic bonds from the private sector and sell francs in the open market. The resulting biggest ever one-day drop in the franc versus the euro and dollar is likely to be followed by franc depreciation over the next year.

Swiss lending to foreigners brings new meaning to Lord Polonius’s advice to Laertes to “neither a borrower nor a lender be.” The Swiss risk losing more than the friendship of the Hungarians who borrowed extensively in Swiss Franc between 2006 and 2008. They also risk losing their money as Eastern Europe struggles under a mountain of debt. All told, Swiss banks claims on foreigners rose from five times Swiss GDP in 2000 to roughly eight times GDP in mid-2007, according to the Bank for International Settlements (BIS).

The majority of these claims are denominated in US dollars, and that factor will continue to put pressure on the franc versus the dollar over the next year. Swiss banks’ net US dollar books approached $300 billion by mid-2007, according to the BIS.

Now that the SNB is actively trying to push the franc down to raise inflation expectations in Switzerland, watch out. This policy raises the prospects for franc depreciation and increases the case for owning gold versus all reserve currencies.

Comments

[Beach Bubba:]

Hee hee he...Jersey, Jersey, Jersey

Mar 13 09:41 AM

[D. McHattie:]

With central bank after central bank trying to devalue their currency through jawboning and substantive action, how can commodities, hard and soft, not rise?

Mar 13 10:05 AM

[E Thomas St.:]

While I'm not a huge proponent of gold, this action has definitely made me reconsider that stance. When one country devalues explicitly in action, other countries aren't only enticed to do the same, they are almost obligated to do the same. This speaks to the possibility that gold will maintain value not by speculation upward, but by currency conversion downward.

Mar 13 02:12 PM

[mac.barron:]

The Swiss Franc used to be 40% backed by gold. Too bad they gave up on that, although the government has kept a fair amount of gold on hand. Since the government does have that gold the Franc can only sink so low, but I personally wouldn't want to be on that ride down.

Mar 13 07:02 PM

[Ad Orientem:]

A good point in your last lines. Swiss Gold Reserves do place a limit on the danger to their currency which even considering this unfortunate move is in much better shape than the dollar. It's also worth noting that the United States still has the largest reserve of bullion in the world. While I still believe that the ocean of currency out there is going to force a nasty spike in inflation our gold reserves are one important reason why I do not accept the apocalyptic predictions of a hyper-inflation in the dollar.

It will be bad. But not Weimar Germany bad. I expect double digit inflation similar to what we saw during the era of stagflation.


On Mar 13 07:02 PM mac.barron wrote:

> The Swiss Franc used to be 40% backed by gold. Too bad they gave
> up on that, although the government has kept a fair amount of gold
> on hand. Since the government does have that gold the Franc can
> only sink so low, but I personally wouldn't want to be on that ride
> down.

Mar 14 12:39 AM

[Conan the B...:]

Franc, USD, Pound, Loonie, Euro...sell them all and buy Gold.

Toss in some silver too.

Mar 14 06:04 AM

[Rene Cohrt:]

Don't wait, make that insurance against legal tender buy gold.

Mar 14 08:31 AM

[MGA_1:]

Yikes, what's left?

Mar 14 10:35 AM

[The Vet:]

At least the Swiss told the world it was devaluing its currency. Others have been doing the same but keeping quiet about it. Just look at a chart of the Yen/USD for last month and you see that the Yen weakened steadily from around 88 to the dollar to over 98 to the dollar.

That's over 11% depreciation in just over 30 days; the Swiss haven't topped that - yet....

Mar 14 12:54 PM

[wavelength:]

Or do what the Good Book advises: "Sell everything and buy wisdom." (Of course, having acquired wisdom, you will no doubt then buy gold :)

Mar 14 01:23 PM

[Mike10613:]

The USA has a large despit of GOLD in fort knox? Have you seen it? I'll want to feel and touch before I believe that. Reach up you history and then you will find when the USA was bankrupt it appealled yo the citizens to give uptheir gold for paper money. You can fool some of the people all of the time, you can fool all of the people most of the time - but times up - we know you are bull shitting us now. USA is bankrupt - end of story.

Mar 15 09:37 AM