Swiss voters will decide Nov. 30 on an initiative that would force the country's central bank to more than double its gold holdings, a prospect that has rattled markets and drawn opposition from the government, lawmakers and business groups. The "Save Our Swiss Gold" initiative would require the Swiss National Bank to hold a fifth of its assets in gold within five years. It would also prohibit the bank from selling any of its gold in the future and require that Swiss gold held overseas be repatriated. Organizers of the vote, members of the conservative Swiss People's Party, say the new rules are needed because a three-year effort to cap the strength of the Swiss franc has left the SNB holding piles of euros. Those euros, the organizers say, have linked Switzerland to a currency that has been devalued in the wake of the financial crisis. Luzi Stamm, one of the organizers, said the initiative is needed because the SNB isn't managing the nation's wealth properly. "Neither the SNB nor politicians should have the right to sell the Swiss people's property," Mr. Stamm told The Wall Street Journal. To support the campaign, organizers are running a billboard campaign that features a pair of sturdy hands cradling a piggy bank emblazoned with the Swiss flag. Next to it a slogan reads, "Protect the People's Assets." The initiative has set off alarm bells in the halls of the Zurich-based SNB, which won praise for its navigation of the economic slowdown that followed the financial crisis. In order to protect the economy, the SNB said in September 2011 that it wouldn't let the euro weaken beyond 1.20 francs. The cap on the franc is credited with supporting Switzerland's exports, more than half of which go to the European Union. Maintaining the 1.20-franc level forced the SNB to buy euros. The central bank now holds nearly half of its 522 billion francs ($545 billion) in assets in the common currency. By comparison, gold accounts for 7.5% of the bank's assets, down from about 16% when the cap was introduced. The SNB says keeping its gold holdings at 20% would handcuff it by forcing it to buy gold every time it buys euros. That could weaken the SNB's ability to intervene in the market, analysts say, and its earnings performance would increasingly be dictated by gold's market price. The SNB declined to comment for this article. The Swiss federal government, both houses of parliament and business lobbies, including Economiesuisse, have recommended voters reject the initiative because it would affect the SNB's policy and, by extension, the economy. A majority of voters and a majority of Switzerland's 26 cantons, akin to U.S. states, need to approve the initiative for it to pass. Already, the currency market is pricing in the prospect of a challenge to the SNB's cap. In the run-up to the vote, the franc has risen to its strongest level in 26 months, edging closer to the cap. The cost of using options to hedge against volatility in the euro against. the franc has also started to increase, a signal that traders are nervous the currency duo, which has barely budged since the cap was introduced, could begin moving if the initiative passes. The cost of hedging against moves in the pair, measured in terms of implied volatility, has risen from 1.78% at the end of October to around 4%. Implied volatility reflects the perceived risk of movement in the price of the underlying currency. "Markets are waking up to this event," said Andre Meyer, a partner at ACT Currency Partners, a Zurich-based currency specialist. ACT has been asking its ultra-high-net-worth clients to consider buying options on the currency pair in advance of the vote, he says. The initiative has also started influencing the gold market, analysts say. The prospect of a huge wave of buying by the SNB is providing support for the precious metal's price. Analysts estimate the SNB would likely need to buy about 1,500 metric tons of gold, worth roughly 60 billion francs at current market rates, to meet the initiative's requirement. The bank now has 1,040 tons. Support for the initiative has waned in the run-up to the vote. In a survey conducted Nov. 19, 38% of respondents said they were in favor, down from 44% in an October poll. In the latest survey, 47% of respondents said they were opposed to the shift. Still, the subject of gold remains emotionally charged for many voters. "Gold still represents traditional Swiss values, like quality and security," said Franz Albiez, an insurance manager who lives in Baden, about 20 kilometers west of Zurich. Mr. Albiez says he is leaning toward voting for the initiative, though he hasn't made up his mind. Requiring the SNB to hold higher gold reserves could leave the bank's performance vulnerable to a drop in gold prices, critics say, making it harder for it to turn a profit. That, in turn, could threaten payments the SNB usually makes to Switzerland's federal government and the cantons. Last year, the SNB drew scorn for scrapping those payments for the first time in more than a century after posting a $9.6 billion loss that was caused by a huge write-down in the value of its gold holdings. The SNB has taken "hefty public and political criticism" for canceling payments in the past, said Alexander Koch, an economist at Raiffeisen Schweiz. If the initiative passes, Mr. Koch said, "This is likely to be the case in the future." Source: MarketWatch
