In my previous article, Switzerland And The Change Of The World Economic Order This Weekend, I touched on how the recent Swiss referendum on gold has the potential to change our modern 21st century monetary affairs.
Today the results of the referendum are out and we can analyze the implication of this referendum. Although Switzerland is small in terms of size, its Central Bank, the Swiss National Bank (SNB) has a balance sheet of approximately 524 Billion Swiss Franc (CHF). This referendum would have forced it to purchase 1500 tons of gold, or 7% of annual gold production over 5 years, to keep gold at 20% of its balance. The immediate effect on the world gold prices and the conduct of monetary policy would have been tremendous and lasting.
This has been overwhelmingly defeated by a double majority of the cantons and voters. An overwhelming 78% of the voters rejected it compared to 22% of the voters who endorsed it. It would appear that the SNB did a good job to persuade voters of the virtues of the current monetary system. The last poll showed that a 38% of the voters being in favor of the referendum. In addition, this referendum has registered relatively lower public interest as seen in the low turnout rate of 49.85% compared to an average of 56% for previous referendum.
The above table shows the results and turnout for the previous referendums which will serve as an anchor for our discussions here. We can see that from the previous results, the Swiss people have not shown as much unity before in rejecting a referendum. In addition to 78% of voters rejection to the referendum, we have 100% of the cantons who rejected it.
This referendum is solidly disadvantageous to the cantons because they get 2/3 of the profits from SNB actions. This will evaporate if the SNB is forced to hold 20% of its balance sheet in gold from massive buying of gold in the open market.
At the end of this referendum, we can say that the position of the SNB has been solidified and it stands in a better position to defend its peg of the EURCHF at 1.2. In fact, we can see from the EURCHF that there was a gap up. This indicates that the market is less willing to test the SNB imposed floor of 1.2 EURCHF.
It appears that a resistance of 1.2025 would be created soon but it remains to be seen.
Overall this resounding defeat of the Swiss gold referendum would mean that the world economic order remains status quo. The SNB remains in position to intervene in the economy to provide macro prudential support for its bank as a lender of last resort. It will continue to expand its balance sheet to maintain the peg of 1.2 EURCHF. For now, it appears that the return to a partial gold standard in Switzerland has been buried and the world moves on to other issues such as Federal Reserve rate hike and European Central Bank's possible sovereign bond purchase.
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