Swiss Initiative Reveals Push for Gold-Backed Currency

On March 20, 2013, the Swiss People’s Party, considered a right-wing populist and nationalist party, collected enough signatures to force a referendum on Switzerland’s gold reserve. If passed the initiative would require the Swiss National Bank (SNB—the country’s central bank) to maintain at least 20% of its assets in gold, and mandates that the gold be kept entirely in Switzerland. The Swiss National Bank, not surprisingly, does not consider this a great idea.

Switzerland, the last issuer of paper currency backed by gold reserves, began reducing its reserves after the country’s new constitution took Switzerland off the gold standard in 2000. Previously, the SNB was mandated to keep at least 40% of the Swiss Franc in gold reserves. In the intervening 13 years, gold reserves have declined to 1040 metric tons, or approximately 10% of the SNB’s assets. Bringing the reserve up to the 20% threshold required by the referendum would cost approximately $50 billion, if they could find the volume for offer, that is.

The measure doubtless would contribute to a rise in gold prices. With approximately 1,000 metric tons more gold locked into Swiss vaults, the available market supply would necessarily decline, leading to price increases. Bar shortages persist in Dubai.

One immediate effect of the referendum campaign was the disclosure of a closely guarded state secret. As Reuters reports, “In 2003, then Swiss Finance Minister Kaspar Villiger famously told parliament he couldn’t divulge where the gold bars are stored because ‘I don’t know either, don’t have to know, and don’t want to know.’” To head off concerns that Swiss gold reserves were too scattered, Thomas Jordan, the chairman of the Swiss National Bank, broke thesecret: 70% of the gold remains in Switzerland; 20% of Swiss gold is kept at the Bank of England; and the remaining 10% is stored at the Bank of Canada.

The SNB strongly opposes the referendum on the grounds that it limits the bank’s scope of action and control of monetary policy. Repatriating all the gold, Jordan argues, would endanger “adequate regional diversification and good market access.” Moreover, when made an unsalable asset, the gold reserve would no longer be available for use to support monetary policy or to fend off a crisis.

There is, however, one reliable way for central banks to use gold reserves—to return to a gold standard. This may be the secret agenda behind the Swiss People’s Party support for the referendum. In July 2011, the party introduced ameasure to create a gold Swiss franc and make it co-legal tender. The bill was defeated, but the spirit may be alive and well.

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