NOSTALGIA FOR GOLD PRESSURES CENTRAL BANKS IN EUROPE / THE WALL STREET JOURNAL

Commodities

Nostalgia for Gold Pressures Central Banks in Europe

Swiss Vote Sunday Could Force SNB to Raise Holdings of Precious Metal

By Brian Blackstone And Jon Hilsenrath

Nov. 27, 2014 4:53 p.m. ET

The 2008 financial crisis and its aftermath have revived interest in a monetary policy instrument of a bygone era: gold.

This trend is especially pronounced in Europe, where central banks face public pressure to buy more gold or bring back home what they hold in vaults overseas.

Gold hasn’t played a significant role in global monetary policy for decades and central bankers hope it stays that way, even though some have used gold’s symbolic allure to try building trust with citizens frustrated by years of easy-money policies.

The Swiss National Bank could be forced to more than double its gold assets, and be banned from selling them, if the Alpine country’s voters on Sunday back a populist initiative the central bank vigorously opposes.

The “Save Our Swiss Gold” campaign would require the SNB to hold a fifth of its assets in gold within five years. It would also prohibit it from selling its gold and require that Swiss gold held overseas be repatriated.

Although polls suggest the initiative will fail, the referendum symbolizes the nostalgia for gold in some corners at a time when many European economies face stagnation and too-low inflation. Their central banks have responded with controversial measures loading their balance sheets with financial assets that critics, particularly in Germany but also in Switzerland, see as too risky.

Germany’s central bank made a public-relations splash with its decision last year to return home some of the country’s gold from vaults in the U.S. and Paris, which followed a campaign led by the mass-circulation Bild-Zeitung called “Bring Our Gold Back Home.”

The Bundesbank says its decision was made autonomously. Still, it has displayed gold bars to photographers and TV crews and included an exhibition of its gold at a summer festival.

The Bundesbank hasn’t conducted its own monetary policy since the 1990s when Germany joined the euro, which is governed by the European Central Bank. Bundesbank President Jens Weidmann sits on the ECB’s policy committee and has opposed many of the bank’s economic stimulus measures.

The Dutch central bank, which is also part of the ECB, followed suit recently by announcing it would repatriate gold from the U.S., even though its president said in 2012 he saw no need to do so and the gold was “absolutely safe in Manhattan.” The decision to bring some back to Dutch soil could “have a positive effect on public confidence,” the bank said last week.

“This is part of the allure for gold. Frequently it has been the asset that reflected power and might,” said Joshua Aizenman, a professor at University of Southern California. However, “if you look at pure economic return on gold it’s definitely not a conservative asset.”

Gold’s more recent volatile swings—at $1,195 an ounce Wednesday, gold was down 37% from its August 2011 peak—betray the idea that it is a stable asset. These swings have forced the ECB and SNB, at times, to mark down the value of their holdings. In the SNB’s case, it led to a $10 billion loss in 2013, forcing it to cancel dividends for the first time in more than a century.

The populist Swiss initiative “is both unnecessary and dangerous,” SNB Chairman Thomas Jordan said Sunday. “It is unnecessary because, under the current monetary order, there is no link between price stability and the share of gold in the SNB balance sheet.”

Former Federal Reserve Chairman Ben Bernanke has made similar arguments. “A lot of people hold gold as an inflation hedge, but movements of gold prices don’t predict inflation very well actually,” he said during an exchange with lawmakers in 2013. “Nobody really understands gold prices, and I don’t pretend to understand them either.”

Authorities in the U.S. and Europe experimented with varying versions of gold and silver monetary standards through much of the 19th century, imposing rules and order on the printing of paper currencies. But these standards also coincided with periods of large economic and financial volatility; financial booms and busts were common during the 1800s, in part as the physical production of gold from mining activities waxed and waned, leading to sharp expansions and contractions in bank lending.

Gold standards broke down across the developed world in the 20th century. Central banks—battling deflations, inflations, recession and war—sought flexibility to manage their own money supplies amid economic and social turmoil.

“The strength of a gold standard is its greatest weakness,” Mr. Bernanke said in 2012. “Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.”

Unlike many other central banks, the Fed doesn’t own gold. Among the changes imposed during the Great Depression, the Gold Reserve Act of 1934 required the Fed to transfer ownership of all of its gold to the Treasury Department.

The idea of a return to a gold standard still attracts a small but passionate following in some corners of Wall Street and Washington, but has tended to lack broad appeal among Americans.


—Neil MacLucas in Zurich and Maarten Van Tartwijk in Amsterdam contributed to this article.