Many gold (GLD, DGP) bulls and investors have been wondering why the price of gold is not hitting new highs given the problems in Europe. Certainly, European investors should be running for the safe haven of the yellow metal in this time of bank runs, bailouts, and money creation.
The real story about the gold price coming from Europe comes from an area that most would not realize, Switzerland.
In September of 2011 the Swiss Central Bank decided to peg the franc/euro rate at 1.2:1 in an attempt to stem the appreciation of the Swiss Franc against the euro.
Since then the Swiss Central Bank has been forced to defend the peg in an odd manner, accumulating reserves at an alarming rate in order to maintain the peg. Central bank reserves have been at an alarming rate, exploding to 303.8 billion francs, an increase of 66 billion francs from April's 237.6 billion franc figure.
So where is this money going once it enters Switzerland? The Swiss sovereign debt market. Take a look for a moment at the yield curve for Swiss Government securities which can be found here.
Yes, those yields are correct. A significant portion of the Swiss yield curve up to four year yields has dropped below zero, meaning that the government is being paid to financing its debt at these maturities. The yields have fallen so low that even the 30 year bond is selling for a hair more than one percent.
If money continues to flow in at these rates the Swiss government will be forced to make a significant decision with regard to their currency peg. Will they continue to support the peg or will they allow the Swiss franc to free float?
In the past few weeks Swiss officials have begun to float the term 'capital controls' in an attempt to stem the flow of funds into Switzerland. The market is not taking to potential threat seriously but just the inference is important as an economy as small as Switzerland cannot continue to print francs to maintain the peg forever.
The Swiss franc peg may just be the linchpin for the price of gold as the significant accumulation of currency reserves and negative government bond yields creates an unsustainable recipe for the future and a couple of catalysts for the future.
At some point in time investors will tire of negative yields, creating a catalyst for a switch from Swiss government bonds into gold. For those who say that gold may have no yield I would counter that neither do Swiss bonds out to 4 years.
A second catalyst for a move into gold would come from continued fist shaking and increased threats over the implementation of capital controls from the Swiss government which would cause investors to look or deploy some capital elsewhere to counter the threat.
In the meantime the best bet for gold bulls is to sit back and be patient as the time is coming when gold will once again have its day in the sun.