Investors will see a new movement in international markets when it comes to gold. On November 30th, the citizens of Switzerland will decide the financial fate of their country when it comes to monetary stability and the value of their currency. A yes vote for the proposed Save Our Swiss Gold Initiative, would dramatically change the way the Central Bank of Switzerland conducts business. In short, it would require the Swiss to hold 20% of their $547 billion USD (United States Dollar) reserves or assets in gold. If this becomes the new national trend elsewhere, it will create a stampede in gold that will send commodity prices in precious metals skyrocketing. Despite the negative sentiment towards gold at the moment, it is important to note that the metal is only down 1.3% this year.
Although the initiative is unlikely to pass at the moment, it does indicate that more of the citizenry in Switzerland and throughout the world, are beginning to understand that currencies everywhere, are being debased. It is supposedly being done to facilitate the short term goal, of trying to stimulate additional domestic economic growth. Others are insisting that the effort is to destroy national currencies, so the way can be paved for a new international, one world currency.
In the past the Swiss National Bank (SNB) held 30% of reserves in gold, but in recent times has either sold or leased the majority of the nations holdings. There is just 7.7% of total assets remaining in gold. The Swiss People’s Party known as the SVP was successful in getting a national referendum scheduled after collecting 100,000 signatures. The SVP felt the vote was necessary after the Swiss Parliament decided against the measure earlier.
If the initiative would pass what would actually happen? It would be a shock wave to prices for gold and other precious metals. Why? In Switzerland it would mean that the SNB would need to purchase 1,500 tons of gold over a 5 year period. What is more newsworthy is that the purchases would be permanent. The gold could not be sold in the future. To comply with the measure the SNB would be instructed to purchase 10% of global gold production until 2019. This would of course have an impact on gold prices globally.
As can be expected the SNB vehemently objects to the proposed law, because it would restrict the central bank in monetary policy. For every Euro or dollar held in reserve the SNB would need to purchase additional gold, which can never be sold.
The measure has a major hurdle to pass over, because even if the vote is affirmative (the national vote is too close to call in polls), the Swiss Parliament would still need to approve of the measure. The Swiss Federal Council and both houses of the Parliament have recommended that voters not approve the motion. In addition, a majority of the 26 Swiss Cantons would also need to approve of the bill, which many of them are at present still against. This is most likely due to the financial implications. The SNB claims federal outlays to the cantons would need to be reduced if the measure passes.
Why should the activities in Switzerland concern the international markets? Well, for one thing it would reverse the present flow of gold out of the bank vaults in Switzerland and make that supply no longer available. If the movement spreads, the ongoing sale of gold from Europe to Asia would cease. China the worlds largest producer of gold, already prohibits any domestic output to be sold abroad. If India continues to buy gold at the present rate, it will be difficult for producers to meet the international demand at existing world prices.
In the third business quarter India has once again regained its position from China as the world’s largest gold consumer. While China only bought 182.7 tons of gold in the 3rd quarter, India purchased 225.1 tons in jewelry, bars and coins. Demand for gold jewelry in India has surged 60% to 182.9 tons in the third quarter. This is the highest level for the quarter since 2008. India’s October gold imports alone, surged 280% year on year to $4.18 Billion USD. This is largely attributed to lower prices for gold at the moment. In contrast, global demand for gold jewelry had dropped by 4% to 534 tons during the months of July, August and September. Gold remains the preferred choice for investment in the majority of Indian households.
In China, gold jewelry consumption dropped by 39% in the 3rd quarter. Gold coins and bars demand also dropped 30%. This lead to an overall decline in China of 37%. This is occurring because many Chinese are watching previous investments in gold, decline in value. Unlike India,Chinese consumers seem more concerned with present value rather than the long term. The anti-graft drive in China has also reduced demand for bullion. Of course the Chinese government on the other hand, is continuing to squirrel away vast hordes of gold. They are most likely the largest holders of gold in the world with upwards of 10 thousand tons. It is highly unlikely that the United States has the amount of gold that it claims to possess. The amount of gold on deposit at Fort Knox, Kentucky which serves as the national vault, has not been audited for years.
In the Middle East lower prices for gold has caused greater demand for the metal. This is especially true in the United Arab Emirates, where gold jewelry demand is up 15 to 20% in 2014 alone.
In other parts of Asia, gold demand is down for the private sector. In Indonesia, Southeast Asia’s largest economy purchases for gold declined 45% in the 3rd quarter, because of political instability. This was the same reason why gold demand declined 42% in Thailand in the same quarter. A new sales tax in Japan drove consumption of gold down by 45%, during the same time period.
So if one considers the Asian market, gold should stabilize at the present price for the time being. If new demand arises in Europe all bets would be off. It is unlikely that prices could be maintained at their present level, given that gold is now being sold slightly below the cost of production, which is roughly $1,200 USD.
What has brought gold down to the present levels in price, has been the strengthening of the United States dollar and the supposed improvement in the American economy. The end of quantitative easing and the possibility of higher interest rates in the United States, has put a downward pressure on gold prices. This is true because more investors are now putting financial resources into the American Stock Market, bonds, Treasury Notes and the American dollar itself.
However, there are a number of central banks around the world that are continuing to increase their holdings in gold. Case in point is Russia, which bought a enormous amount of gold in the 3rd quarter. A total of 55 tons were snapped up by the Russians, as the prepare for the possibility of a long term economic war with the Western countries of Europe, the United States and Canada. Russian purchases were more than all other central bank purchases combined in the quarter. Russia has increased gold reserves by some 300% in the past decade to some 1,150 tons.
Taking advantage of lower prices Kazakhstan purchased 28 tons of gold, Turkey has increased it holdings of gold in excess of 12 tons as well, followed by Azerbaijan with 7 tons. Next in line are Mauritius and Tajikistan with 2 tons and 1 ton of gold respectively.
In total central banks around the world have purchased 93 tons gold in the 3rd business quarter. This is the 15th quarter in a row where purchase have increased. The total purchases for the year 2014 by the central banks is estimated to be 500 tons. This is likely to continue with ongoing geopolitical tensions and the uncertain longer term future of the United States dollar.
Unlike many western countries in Europe and in North America central banks around the world are on course, to acquire ever larger caches of gold. The steady transfer of metal wealth from the West to the East continues unabated at the moment. This is why what happens in Switzerland is important. It might well be the beginning of a movement to stop the liquidation of Western bank gold holdings. The citizenry are starting to wake up to what is actually happening. They are no longer as willing to let the so called financial experts run domestic economic and monetary affairs unfettered. More importantly, many of the central banks around the world now wish to take physical possession of their gold. There are less and less willing, to allow it to reside in the vaults of Western banks. They are not reassured with pieces of paper that indicate their present balance of gold and other precious metals. The Western charade of selling the same gold deposits to numerous customers is about to end.