Is The Swiss Gold Referendum Impacting The Price Of Gold

The “Save our Swiss Gold” referendum is currently making headlines around the world.  For those who haven’t followed this story, here’s a short recap [you may jump to the charts below if you are already up to date]: the Swiss will vote on the 30th of November to force the Swiss national Bank (SNB) 1. into increasing Gold reserves to 20% of its balance sheet, 2. to forbid it from selling any of its Gold in the future and 3. to force it to hold all these Gold reserves within the country.  What the referendum is really after is to curb the SNB’s rapid expansion of foreign currency reserves (now totalling almost U$500bn, or more than 80% of its balance sheet or circa 75% of the Swiss economy’s national output).  In a world of central bank balance sheet expansion and concerns over “fiat” money, this goal may seem a reasonable one.  Now consider the historical context. These reserves started to accumulate in the wake of the 2008 financial crisis and during the subsequent Eurozone debt crisis as the SNB attempted to mitigate the Swiss Franc’s “Save haven” status and its rapid appreciation vs the Euro by buying foreign denominated securities.  Indeed, from 2007 to 2011 EUR/CHF had dropped almost 40% from 1.60 to near parity pushing Switzerland into recession and deflation (the Eurozone is Switzerland’s largest trade partner representing more than 45% of its exports and 65% of its imports).  In August 2011, the SNB introduced a 1.20 floor level on EUR/CHF committing to defend it and triggering a further acceleration of foreign denominated asset purchases.  If this intervention cannot go on for ever, it is widely accredited for having put Switzerland back on the growth path.

Now, the latest polls are tight with 44% in favour of the referendum, 39% against, with 17% still undecided.  The Swiss National Bank is voicing aggressively against it (a rare event in Swiss politics) and to be fair, we would agree with it, as passing this referendum will significantly reduce its ability to defend the floor with dire economic consequences if it were to break.  Analysts do believe the bill has limited chances of making it through as most major parties are against it and historically, the undecided do end up voting against what they don’t understand.

Accept our apologies for this long introduction, but isn’t it a dream come true for many gold bugs out there?  In a recent study, a large US investment bank estimates that in order to comply with the referendum (the initial 20%), the SNB would need to buy circa 1’500t of gold, spread over 5 years (300 t/year) and that “while gold liquidity should be efficient to accommodate these purchases, this dynamic would reinforce a firm floor at $1’200/oz, with price potentially rallying to $1’350/oz in the intermediate aftermath of a possible referendum”.  Although low probability, anticipation of the referendum should at least have some impact on the market discounting machine.  Let’s look at the charts (they are quite unilateral for now).


This Investor’s View of Gold (a Weekly, Daily, Hourly chart combination) is labelled a “Potential Continuation downtrend”.  Our Weekly charts, which have been negative for almost 2 years, still show some downside potential in price and time with our possible target range between $1’175 and $961 (or an $1068 mid point possibly towards late this year, 1st half next year).  On our Daily charts, the lower range of our targets seem to lead towards 1’130 over the next few weeks (the $1’160 mid point has just been achieved and the trend is still heading down).  On our Hourly chart, impulsive targets are fulfilled, but our time targets are still outstanding (red timing sphere still outside of the chart) and our risk index is not yet oversold.  No sign of any Swiss Gold referendum anticipation yet.

Now let’s turn to the Trader’s View of Gold, a 60min, 15min and 4min combination:


It is also in a “Potential continuation downtrend”, although targets have been reached on all three frequencies.  This may point to some exhaustion in the recent acceleration.  What is more interesting in our view is what triggered the latest acceleration: the more hawkish than expected FOMC Statement on Wednesday 29th of October.  Not much of a Swiss referendum influence there.  The breakdown was triggered by the expectation of timely interest rate hikes next year (and the related Dollar strength), or the cost of holding gold in an improving economy.

Finally, we will look at an Investor’s View showing the relative chart of the HUI Gold Bugs Index to the GLD –SPDR Gold Trust (HUI/GLD or Gold Mines vs Gold):


Over the last ten years, this relative chart has often accelerated up in the early stages of any bullish Gold move: mid 2005 to early 2006, end 2008 to end 2009, mid 2012 and to some extend earlier this year (naturally mines are leveraged to the price of Gold).  At present, it is still showing some downside potential on all three frequencies.  It is interesting to note that Gold’s recent bounce off $1’200 earlier this month, did not produce much of a reaction.  We will however be watching this pair closely over the following months for any earlier indications of a sustainable reversal (linear fall for now on our Daily charts).

So is the Swiss referendum having any influence?  From our selection of charts, the dynamics seem to be elsewhere.  Gold is still sought as a protection and with the US economy on the road to normalization (growth and expected interest rates hikes) and the S&P flirting with new highs, the cost of holding it is increasing everyday.  Now, Bear markets don’t last forever and this one does recall the one on Gold between end 1974 and late 1976 (a drop from circa $195 to $103 before resuming its secular uptrend).  Our Weekly charts on Gold, although still in a descent, are getting closer to their targets in price and time.  As for the referendum, the recent drop in the price of Gold may help the SNB convince voters that holding 20% of its reserves in non-saleable Gold isn’t that good an idea after all.

One last chart for the road, an Investor’s view (Weekly, daily, Hourly) on Brent vs Gold:


The relationship came close to breaking into downside Impulsive territory on our Weekly charts earlier this month (only corrective down for now), the Daily chart did reach their downside targets and our Hourly charts are starting their correction up.  This chart is extraordinarily similar to the one we presented last week (SPY vs TLT) and in a way, may reflect the same thing, an uptake in inflation expectations and sustained growth in the economy.  Let’s hope this relation holds and reinitiates its Daily and Weekly uptrends.

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Have a great weekend,

J-F Owczarczak (@fingraphs)

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