"Saving Switzerland's Gold" won't save the day

Forex News and Events

On November 30th, Swiss people will vote to decide whether

- The SNB should hold 20% of its reserves in gold,

- The gold reserves should be stored in Switzerland,

- The SNB should be allowed to sell its gold reserves.

The recent polls revealed 45% support for the campaign, while we believe that the likelihood of a “yes” vote is limited. Both chambers of Swiss parliament are heavily opposed to the “golden cage”. One thing is sure: polls tend to be unstable and therefore should inject some volatility to relatively quiet Swiss markets in month ahead.

In a recent interview, Swiss Finance Minister Eveline Widmer-Schlumph said the current 1,040 tons of gold reserve is more than sufficient to taper risk-off periods. To which we add that the negative correlation breakdowns since 2007 crisis has proven that the gold is not a perfect hedge nowadays. Nor a source of stability. As the VIX index surged 80% in October 2008, the 1-month realized volatility in XAU/USD spiked to 56%, the 1-month implied vol neared 58%. This is certainly not a track record one seeks in a safe-haven investment.

In this respect, to condemn one fifth of SNB’s balance sheet to a risk asset is not efficient from a portfolio point of view. Even if this was the case, there is no restriction preventing SNB from allocating 20% of its assets into gold.

The SNB currently holds about 8% of its reserves in gold (USD 43bn of gold holdings versus CHF 522bn balance sheet). Introducing the potential 20% bottom will therefore require a sizeable market operation, the necessity is somewhat uncertain. Especially regarding the quantities on table, a 1500-ton XAU-long operation (in five year period) can hardly be profitable for the SNB. Given that the annual mine production nears 3000 tons, this would mean that the SNB would buy 10% of world’s mine production per year during the five next years. This additional gold demand can only push the gold prices higher and increase the cost of the operation. In addition, a “yes” vote will certainly boost speculative demand and provide an additional leveraged lift to the market, pushing the gold prices disproportionally higher! At the end of the game, the SNB would only constitute an expensive reserve in a quiet risky asset.

The gold initiative is therefore a heavy constraint on SNB strategy and would only limit the independence and efficiency of SNB’s investment activities. In fact, the SNB, unlike its worldwide peers, has a meaningful maneuver margin on its activities. While the majority of its counterparts invest mostly in sovereign bonds, the SNB has the flexibility to hold 30% of its balance sheet in foreign assets, corporate or sovereign, which provides interesting geographical diversification and undisputable time advantage. In 2008, the SNB opened a branch in Singapore “to extend its coverage of markets in Asia”, “to ensure a more efficient management of its assets in the Asia-Pacific region” and more importantly to “facilitate round-the-clock operations on the FX market”.

It would only be dangerous and expensive to narrow SNB’s maneuver margin. The SNB has already an important constraint: it should defend its 1.20 floor versus the euro. The situation in the Euro-zone remains alarming with the possibility of QE introduction in the close future. Although we do not see an immediate impact on the franc, the SNB clearly needs to keep the entire control at hand, and that rules out the sizeable 20% gold constraint that a “yes” vote would require.

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Today's Key Issues (time in GMT)

2014-10-23T12:30:00 USD Sep Chicago Fed Nat Activity Index, exp 0.1, last -0.21
2014-10-23T12:30:00 USD Oct 18th Initial Jobless Claims, exp 280K, last 264K
2014-10-23T12:30:00 USD Oct 11th Continuing Claims, exp 2380K, last 2389K
2014-10-23T13:00:00 USD Aug FHFA House Price Index MoM, exp 0.30%, last 0.10%
2014-10-23T13:45:00 USD Oct P Markit US Manufacturing PMI, exp 57, last 57.5
2014-10-23T14:00:00 EUR Oct A Consumer Confidence, exp -12, last -11.4
2014-10-23T14:00:00 USD Sep Leading Index, exp 0.70%, last 0.20%
2014-10-23T15:00:00 USD Oct Kansas City Fed Manf. Activity, exp 6, last 6

The Risk Today

EURUSD EUR/USD continues to weaken, as can be seen by the break of the hourly support at 1.2706 (see also the rising channel). A further decline towards the key support at 1.2501 is favoured. An hourly support can be found at 1.2625 (15/10/2014 low). An hourly resistance now lies at 1.2743 (intraday high). In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).

GBPUSD GBP/USD has bounced sharply near the key support at 1.5855 (12/11/2013 low). However, prices have thus far failed to invalidate their succession of lower highs and the hourly support at 1.6030 is challenged. A key resistance stands at 1.6227. In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. Despite the recent short-term bearish momentum, we favour a temporary rebound near the support at 1.5855 (12/11/2013 low). A key resistance lies at 1.6525.

USDJPY USD/JPY remains well supported despite the recent failure to break the resistance at 107.59. An hourly support can be found at 106.25. Another resistance lies at 108.74. A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. Despite the recent decline near the major resistance at 110.66 (15/08/2008 high), a gradual move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high). A key support lies at 105.44 (02/01/2014 high).

USDCHF USD/CHF continues to improve since its 15 October low. The resistance at 0.9491 has been broken and the one at 0.9562 is challenged. An hourly support now lies at 0.9473. Another resistance can be found at 0.9593. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).

Resistance and Support: