The Swissie and Gold

By Brad Zigler

The Swiss have been known for their ability to stay out of others' fights. Neutrality is, um, fiercely defended in the Alps. And so is the Swissie's strong gold backing.

The Swiss resisted membership in the United Nations until 2002, but have long provided a welcome home for U.N. organizations like the High Commissioner for Refugees.

U.N. membership was a watershed event for not only the Swiss, but hard money advocates as well. The Swiss abandoned their gold reserve requirement at about the same time, essentially decoupling their franc's value from that of the metal.

Well, in part, anyway.

Of all the major currencies, the Swissie is still backed by more gold than other major world currencies. We got some sense of that in "Translating Currencies Through Gold," but the current forex market choppiness and the upcoming half-time break for 2008 got me thinking: "How have the majors done this year in gold terms?"

My litigator friends will be pleased to note that I never ask a question without first knowing the answer.

In the first six months of 2008, the price of gold in Swiss francs has actually fallen 5% on an annualized basis, while it's risen against the Yankee dollar by nearly 12%. Rising gold prices are a traditional signal of currency inflation. I'll let you guess what depreciation means.

2008 Gold Price In Various Currencies

Looking at the chart, you get the sense that the greenback and the pound sterling pretty much move in lockstep. They're certainly inflating at about the same level. But in terms of correlation, the yuan is actually more tightly joined to the dollar, even though the Chinese currency appreciated modestly in gold terms over the first half. That's not surprising, since the People's Bank of China is gradually chipping away at the peg connecting renminbi to dollars.

That the Swissie has the worst correlation to the buck among the Big Six shouldn’t be a surprise either. At least it shouldn’t be a surprise to those who know a little about the residual gold-backing currencies.

Dollar Correlations

	Annualized Gain/Loss vs. Gold	r2vs. USD
US Dollar (USD)	-11.5%	--
Chinese Yuan Renminbi (CNY)	1.7%	.99
British Pound Sterling (GBP)	-14.5%	.94
Euro (EUR)	0.7%	.91
Japanese Yen (YEN)	-2.7%	.85
Swiss Franc (CHF)	5.1%	.84

Comments

[GMiki]

I wouldn't compare the Swiss currency to gold in what is for gold a consolidation period. Compare over the last 52 weeks and you'll see a MUCH greater appreciation for gold. Why be in a fiat currency when you can be in gold? This is misleading in that it seems to say the Swiss franc is better than gold. It's certainly not.

No wonder individual investors feel so overwhelmed by the markets--people who trade for a living make it all sound so arcane. It doesn't have to be. We don't have to think about the currencies though it's interesting to watch the dollar index, a fundamental for many of the assets that go up and down here. However, for the unsophisticated investor, just know the dollar will be winding down and hold some gold and silver to offset your dollar losses.

[Managing Editor]

GMiki -

There's no representation made here that the Swiss franc is "better" than gold.

Rather, we observe the degree to which a currency is "pegged" to the dollar against its gold-denominated value.


Investors dealing with international assets, including those holding foreign stocks and bonds, or mutual funds holding such assets, are, by default, in the foreign exchange market. Each time they buy an offshore stock or bond, they're selling dollars to buy francs or yen or euro, depending upon the home currency of the target security.

Aren't they entitled to know the value they're obtaining when they make such investments?

To say that the period cited isn't relevant because it's a "consolidation period" smacks of data mining. If we only report data that supports some preconceived notion, we have no credibility as dispassionate observers.

If you'd followed the articles embedded link to "Translating Currencies Through Gold," you would have seen a graph and supporting data on THREE YEARS of currency/gold valuations.

[FreddieBoy]

Harry Browne did some great work on "gold backing" of currencies in the 70's. I have held cash reserves in Swiss Francs for years ( not as a gold allocation) and have done VERY well. Don't use SF as a gold hedge but a cash hedge instead of US$

[oroman]

the swiss have been sellinmg their gold at a staedy pace fo the last years.....