It was only a few days ago (Sunday, November 30, 2014) that the voters in Switzerland overwhelmingly rejected the conservative party’s initiative of requiring the country to hold 20 percent of their reserves in gold. In the lead-up to the vote on the referendum, pundits were saying that a “yes” vote would send gold prices soaring and a “no” vote would likely dampen the spirits of the gold bulls. With the resounding defeat of the referendum, you would have expected gold prices to retreat when gold began trading on Monday morning. They did. In overnight trading, prices dropped to a low of $1,142.83. Then, when the markets opened on Monday, we saw a huge reversal in the price of the yellow metal. Gold soared well above $1,200.00 an ounce before settling at $1,211.00 for the day.
Gold Prices Down, Up and Back Down Again
What happened? Suddenly those same pundits who were predicting gold prices to continue to be weak after the “no” vote was official had to find a new reason why prices moved opposite of their expectations. When the price of gold dipped below $1,150.00 an ounce, it ignited demand and buyers stepped in and drove the price higher. As the price started to rise, investors who had made big bets that gold prices would drop even further had to cover their short positions. That added to the upward momentum. Then, as if all of the forces positive for gold were aligning perfectly, oil reversed its long and steady decline and shot up by more than $3.00 per barrel.
All of these reasons and a few others, like the value of the dollar, the mention of inflation and the continuing threats from ISIS and other terror groups, were valid points to explain the major reversal in gold (and silver).
Has the Swiss Referendum Already Been Forgotten?
The recent price action of gold has to make you wonder if the vote to reject the referendum on gold in Switzerland was anything more than a temporary hiccup for the precious metals market. Does anyone even remember the temporary spike in gold demand when Scotland was preparing to vote on independence from the United Kingdom?
The Swiss referendum may not have passed, but it did have more significance than Scotland’s choice to remain part of the United Kingdom. Switzerland is not neutral about the value of owning gold. While Switzerland may be neutral in times of war, they are very proactive when it comes to protecting the value of their currency. The vote was a reaction to the devaluation of the Swiss Franc versus the Euro and fiat currencies in general. By requiring 20 percent of the central bank’s reserves in gold, never to be sold, the proponents were attempting to strengthen the Swiss Franc against other world currencies.
The lesson learned by this Swiss referendum was that many other countries and central banks are worried about their currency’s loss of purchasing power relative to the strong U.S. Dollar. It is conceivable that countries with weak currencies might become net buyers of the precious metal in order to strengthen their currencies. If that happens once, it could create a domino effect and other countries (think of Russia) would follow suit. Demand for the precious metal would outstrip supply and holders of physical gold would see a rise in the value of their holdings.