This Little Piggy Bent The Market

By Grant Williams

October 27, 2014     

“Never wrestle with a pig. You both get dirty and the pig likes it.”
“Remember the referendum on the Charlottetown constitutional accord? The more Canada’s political and business elites threatened Canadians that the country would disappear into a black hole if the accord weren’t passed, the more Canadians opposed it.”
When you’re dealing with Switzerland, Mr. Allon, it’s best to keep one thing in mind. Switzerland is not a real country. It’s a business, and it’s run like a business. It’s a business that is constantly in a defensive posture. It’s been that way for seven hundred years.”
About 18 months ago, I had a very pleasant chat with a gentleman by the name of Luzi Stamm.
You may detect some measure of surprise in my words, and the reason for that is quite simple:

Luzi Stamm is a politician; and, as regular readers will know, I am no fan of that particular class.
But Herr Stamm was different.
An MP representing the Swiss People’s Party, Stamm was spearheading a federal popular initiative which needed 100,000 signatures in order to comply with the Swiss parliamentary system’s rigid framework regarding referendums. (OK all you “referenda” people out there, I know, OK? But I’m going with “referendums,” so pipe down).
That initiative was one of three being pursued: firstly, a motion to limit immigration into Switzerland to 0.2% per year; secondly, a drive to abolish the flat tax system and for resident, nonworking foreigners to be taxed based instead on their income and their assets; and thirdly, Stamm’s initiative... Well, we’ll get to that shortly; but before we do, we need to understand a little about how Swiss democracy works.
(Wikipedia): Switzerland’s voting system is unique among modern democratic nations in that Switzerland practices direct democracy (also called semi-direct democracy), in which any citizen may challenge any law approved by the parliament or, at any time, propose a modification of the federal Constitution. In addition, in most cantons all votes are cast using paper ballots that are manually counted. At the federal level, voting can be organised for:
Elections (election of the Federal Assembly)
Mandatory referendums (votation on a modification of the constitution made by the Federal Assembly)
Optional referendums (referendum on a law accepted by the Federal Assembly and that collected 50,000 signatures of opponents)
Federal popular initiatives (votation on a modification of the constitution made by citizens and that collected 100,000 signatures of supporters)
Approximately four times a year, voting occurs over various issues; these include both referendums, where policies are directly voted on by people, and elections, where the populace votes for officials. Federal, cantonal and municipal issues are polled simultaneously, and the majority of people cast their votes by mail. Between January 1995 and June 2005, Swiss citizens voted 31 times, to answer 103 questions (during the same period, French citizens participated in only two referendums)
In Swiss law, any popular initiative which achieves the milestone of 100,000 signatures MUST be put to the citizens of the country as a referendum, and in a country of just 8,061,516 people (according to the July 2014 count — never let it be said that the Swiss aren’t precise), that’s a pretty big ask; but the Swiss do love their votes — so much so that, since 1798, there has been a seemingly never-ending procession of issues which the Swiss people have been entrusted by their leaders to decide:
In 2014 alone there have already been three referendums concerning such diverse issues as the minimum wage, abortion, and the financing and development of railway infrastructure. (For those of you just dying to know the outcomes, the abortion referendum, which would have dropped abortion coverage from public health insurance, failed by a large margin, with about 70% of participating voters rejecting the proposal. The railway financing was approved by 62% of the voters, and the motion that would have given Switzerland the highest minimum wage in the world — 22 francs ($23.29) an hour — was soundly defeated, with 76% of the voters saying “nein.”)
One wonders what the outcome would be of a similar motion to hike the minimum wage to such lofty heights in the US. Or in Great Britain.
The bottom line? The Swiss just think (and, importantly, vote) differently.
But back to Luzi Stamm and the SPP initiative.
Immigration and taxes aren’t uppermost in Stamm’s mind. What he IS concerned about is gold.
When we spoke on the telephone last year, Stamm explained to me that he hadn’t really properly understood the part gold played in the Swiss monetary equation until he’d had it explained to him by a friend more versed in finance (Stamm is a lawyer by background but with an economics degree from the University of Zurich); but once he understood how it all worked, Stamm realized that the changes to Swiss monetary prudence which had occurred in just a few short years were (a) potentially disastrous for the country and (b) not remotely understood by his countrymen (and women).
So Stamm decided he ought to do something about it.
The Swiss had accumulated a significant gold reserve the old-fashioned way — through seemingly constant current account surpluses — over many decades, but in May 1992 they finally joined the IMF.
Once THAT little genie was unleashed, things began to change.
In November of 1996, the Swiss Federal Council issued a draft for a new Federal Constitution, and contained within that draft was an amended position on monetary policy (article 89, in case you’re wondering) which severed the Swiss franc’s link to gold and reaffirmed the SNB’s constitutional independence:
Money and currency are a federal matter. The Confederation shall have the exclusive right to coin money and issue banknotes.
As an independent central bank, the Swiss National Bank shall follow a monetary policy which serves the general interest of the country; it shall be administered with the cooperation and under the supervision of the Confederation.
The Swiss National Bank shall create sufficient monetary reserves from its profits.
At least two-thirds of the net profits of the Swiss National Bank shall be credited to the Cantons.
In April 1999, the revision of the Federal Constitution was approved (how else than through a referendum?), and it came into effect on January 1, 2000.
Oh... sorry... I almost forgot to mention that in September 1999 — after the revision had been adopted but before it had been officially enacted — the SNB became one of the signatories to the Washington Agreement on Gold Sales, meaning that all that lovely Swiss gold which had been sitting there, steadily accumulating and making the Swiss franc one of the last remaining “hard” currencies on the planet, was eligible to be sold.
A single line in the Swiss National Bank’s own history of monetary policy identifies the beginning of the demise of one of the world’s great currencies:
On 2 May, the SNB begins selling gold holdings no longer required for monetary policy purposes.
And there you have it. “No longer required for monetary policy purposes.”
That’s what happens when you finally embrace the beauty of fiat. Not only do you get to sell gold, you get to call the proceeds of those sales “profits.”
The absurdity borders on breathtaking.
At the beginning of 2000, the Swiss National Bank (SNB) held roughly 2,600 tonnes of gold in its reserves. That equated to approximately 8% of total global central bank gold reserves. After the revised constitution became law, the Washington Agreement took over and... Bingo!:
Swiss gold reserves were plundered gently sold in line with the Washington Agreement, and the “profits” (the language used by the SNB themselves) were distributed amongst the Swiss cantons; so everybody in a position to raise questions ended up getting a nice, fat slug of “profit” to keep them quiet help their Canton pay the bills.
Now, does anyone notice anything particular about the period when the Swiss gold sales were at their highest? Yessss... that’s right (as with the UK’s sales), the bulk of Swiss sales were made at the lows in the gold price (between $300 and $500 per ounce — blue shaded area).
To look at it another way, the Swiss National Bank went from being one of the soundest central banking institutions on Earth to just another in the morass of apologist financial institutions that lost sight of their mandates while grasping for a Keynesian free lunch, egged on by a new breed of politicians who knew nothing of the principles of sound money or, if they did, were happy to put them to the back of their minds as they extended their hands.
Sadly, as went the soundness of the SNB, so went the soundness of the Swiss franc itself.
As you can see from the chart above, the SNB has, over the last two decades, oustripped its nearest rival in gold sales by a factor of three.
Adding to the fun and games was the decision in September 2011, at the height of the euro crisis, to peg the Swiss franc to the euro (something that obviously couldn’t have been done prior to breaking the gold peg) in order to stop it appreciating.
How? Why through literally unlimited printing of Swiss francs to stop the exchange rate breaking 1.20.
At the time, the SNB was unequivocal:
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc.
All this talk of “massive overvaluation of the Swiss franc” is utter bollocks a little disingenuous. (“Surely not!” I hear you cry.)
Between 1970 and 2008, the strength of the Swiss franc was legendary. During that time, it appreciated by 330% against the US dollar and by 57% versus the Deutsche mark/euro.
Consequently, a strong currency went hand-in-hand with a strong economy. How awful.
The problem was NOT in the OVERvaluation of the Swiss franc, as the SNB would have you believe, but rather in the UNDERvaluation of the competition; and the only thing the SNB could do was to join in the great devaluation race.
That move weakened the currency by about 9% in 15 minutes, and the immediate effect on the SNB’s balance sheet was obvious:
(Mitsui Global Precious Metals): As late as the end of 2009, the SNB held 38.1 billion CHF in gold out of total reserves of 207.3 billion CHF, with gold representing a touch over 18 per cent of all its reserves. At the end of July 2014, it owned 39.1 billion Swiss Francs in gold (or 1,040 tonnes) from total reserves of 517.3 billion CHF, meaning that roughly 7.6 per cent of its assets were in the form of the yellow metal.
Note that the rise in value of Swiss gold by CHF 1 billion wasn’t enough to counter the destructive nature of overt and unchecked money printing.
Like the Fed, the BoJ, and the BoE before them, the SNB became, at a stroke, another previously sound institution that unhesitatingly ripped its balance sheet to shreds:
Since 2009, the SNB has quintupled its balance sheet, making it (on a relative basis) the most prolific of the central bank printing machines. Not bad for the world’s 96th-largest nation.
Since the EUR peg was instituted just three years ago, the SNB’s balance sheet has more than doubled.
So, with the Swiss franc’s soundness under attack from within its own borders, Luzi Stamm decided to try to use the Swiss love for referendums and the rigidity of the Swiss political process to try to reinstate the Swiss franc as a sound currency.
To that end, Stamm proposed the Swiss Gold Initiative (“Save Our Swiss Gold”).
Funnily enough, the proposal was rejected by lawmakers, but Stamm gathered three like-minded MPs and, more importantly, enough signatures on his petition (100,000) to ensure that a referendum on the proposal would take place; and that vote will happen on November 30th — six weeks from now.
Stamm pulled off a masterstroke in securing the involvement in the Swiss Gold Initiative of Egon von Greyerz who, along with being one of the most highly respected figures in the gold industry, happens to be one of the world’s nicest human beings.
We’ll get to Egon’s involvement shortly, but first let’s take a look at the motions that make up the Swiss Gold Initiative, which are threefold:
1. The gold of the Swiss National Bank must be stored physically in Switzerland.

2. The Swiss National Bank does not have the right to sell its gold reserves.

3. The Swiss National Bank must hold at least 20% of its total assets in gold.
(NB. Before we get to the part of this story where the SNB tell us how big a nightmare it would be to force them to hold 20% of their reserves in gold (come on, you KNEW that was coming), I’d point you back to the chart on page 8. Remember? The one that showed the Swiss held 18% of their reserves in gold just five short years ago?)
Addressing the motions in order, let’s begin with number 1, that all Swiss gold be physically stored in Switzerland.
Switzerland has made its name over centuries as being one of the safest places on the planet to store gold. That reputation has been good enough to convince people from all over the world to entrust their gold to the Swiss for safe-keeping. However, like many other central banks, the SNB stores a certain proportion of its gold overseas. How much? We don’t know. Where exactly is it held? We have no idea (other than “in the UK & Canada”). In fact, when the finance minister was asked, in parliament, where Switzerland’s gold was stored, his answer was something of a head scratcher:
Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know, and because I do not want to know.
Riiiight... Call me old-fashioned, but if I were a Swiss national I’d want a better answer than that.
Anyway, the spurious reason commonly given by central bankers for storing gold in places like London or New York is to have it “close to the marketplace should sales be necessary.”
Obviously, if the Swiss are forbidden from selling their gold and are bound to hold a minimum of 20% of their gold reserves in gold, that argument becomes moot anyway, so shipping it home should be nice and straightforward. Just find out where “in the UK and Canada” it is (I’m sure they gave you a receipt), call them up, and tell them you’d like it back. Now that you’ve sold more than 50% of the gold, it shouldn’t take too long to physically move the rest home. Surely?
Number 2 on the initiative’s wishlist is that the SNB be prohibited from selling their gold reserves.
Now, THAT might be a problem for the SNB in times to come in the “ordinary conduct of monetary policy,” but as we are some ways away from a world in which “ordinary” features in any way, shape, or form where monetary policy is concerned, I don’t think this prohibition is going to matter much. However, if you think this initiative isn’t being taken seriously, you just have to look at an excerpt from a speech given by the governor of the SNB, Thomas Jordan, a matter of days after the Swiss Gold Initiative achieved the 100,000 signatures it required to qualify as a referendum.
If you lean in real close, you can smell the fear:
(Thomas Jordan, speech to general meeting of shareholders of the Swiss National Bank, 26 April 2013): The SNB does not generally comment on any political initiatives. However, the gold initiative has a very direct impact on the SNB’s capacity to act. This is why we are taking the opportunity today to present our viewpoint for the first time on the demands of the initiative.
The initiators see a high level of gold reserves as a guarantee for currency stability. They fear that the Swiss franc will decline in value and that price stability will be threatened if a large proportion of the balance sheet does not consist of gold holdings. They are also concerned that the SNB’s gold reserves held abroad are not secure and will not be accessible in critical situations.
We share the objectives the initiators put forward, such as maintaining currency and price stability and ensuring both the SNB’s capacity to act and its independence. However, the measures proposed to this effect are not suitable; in fact, they are even counterproductive.
Instead, they are based on misunderstandings about the importance of gold in monetary policy and would compromise the SNB’s capacity to act in pursuing its monetary policy, which would run counter to the objectives envisaged. In other words, these measures would, in certain situations, considerably hinder the SNB in fulfilling its monetary policy mandate and be detrimental to Switzerland. We therefore consider it our duty to point out the serious disadvantages of the initiative already at an early stage.
Thomas, if I may?
The SNB’s desire to “maintain currency and price stability” can be summed up by this chart, which will be all too familiar to those who have studied the fiat currencies of the world, but it obviously needs trotting out one more time:
As for the SNB’s capacity to act in “pursuing monetary policy,” what the Gold Initiative will do is effectively stop them from printing unlimited amounts of Swiss francs in order to keep the once-mighty Swiss franc pegged to a potentially obsolete currency like the euro.
Now, I am simplifying here in the interest of expediency, and I am well aware of the restrictions that any kind of gold standard places on a central bank’s operational capability, but it’s important to understand that the Swiss franc functioned perfectly well as a partially gold-backed currency up until 1999, and the desire of the SNB to have carte blanche to debase the Swiss franc at will more flexibility in their monetary policy comes down to their wanting to employ the same tactics being resorted to by the world’s other major central banks.
If you can’t beat ’em, join ’em.
All of which leads us to perhaps the most fascinating part of the Swiss Gold Initiative: the motion to ensure that the SNB immediately acquires enough gold to back 20% of its reserves (a threshold which it must then maintain as a minimum — at a level, you know, about where they were in 2009).
Now, the numbers around this little piece of the puzzle are interesting.
In order to reach the 20% threshold, the SNB has two options open to them: they can either reduce the size of their balance sheet or buy gold.
In life, there are many limbs out onto which one should never venture, but I’m prepared to dance out onto this one like Billy Elliot:
The SNB will NOT reduce the size of their balance sheet in order to meet the 20% mandate should the motion be passed.
There. Quote me on that.
And we all know what THAT leaves, don’t we boys and girls?
Yes, in order to meet the regulations should the Gold Initiative pass, the SNB will need to buy 1,700 tons of gold at the market (assuming, of course, that they don’t expand their balance sheet further in the meantime — something that, with the increasingly weak euro, is doubtful in the extreme). That equates to roughly $70 billion or CHF 67 billion.
And we are talking physical gold. Not futures contracts or complex derivatives but the metal itself.
Put another way, 1,700 tons of gold is roughly 70% of total annual gold production.
Now, the SNB will have five years in which to reach the required 20% limit, but they will essentially need to get started immediately, because with the floor such a big buyer will put under the price and the constant expansion of their balance sheet due to that pesky euro peg, the longer they wait, the more gold they will have to buy and the less they will get for their money.
Catch Zweiundzwanzig.
How’s your attention? Grabbed yet?
OK, good.
Until now, the whole idea of this hokey little referendum has been written off as inconsequential and largely ignored by all but the most buggy of gold bugs. It was written off when Luzi Stamm announced it. It was written off when they needed to get 100,000 signatures; and, amazingly, it was ignored even once they HAD reached the magic number; but recently a number of things have happened which are making some serious waves and causing considerable unease amongst the Swiss banking establishment.
While in San Antonio recently, I was fortunate enough to chat with a displaced fellow Brit who came to meet me at the Casey Summit to talk about the Swiss Gold Initiative, and what he had to say fascinated me.
The gentleman explained a few of the nuances surrounding the framework within which the vote on the Gold Initiative will be conducted, and as I listened I realised that this little vote could potentially become a very big vote indeed.
Firstly, he noted the fact that there isn’t any “no” campaign running against the initiative. Not one that actively campaigns, at least. There will be no billboards, posters, or leaflets distributed making the case for a vote against the SGI. Thus, it’s basically up to the organizers of the initiative to get the word out and educate the Swiss public about the importance of what they’re trying to do in a vacuum.
That, of course, requires money.
During these campaigns, there is no TV or radio advertising allowed, only an old-fashioned leaflet/poster/billboard campaign (how very Swiss), which is an expensive operation to have to finance.
However, a curious quirk of Swiss politics allows anybody (and I mean ANYBODY) to make a donation to campaigns such as these from anywhere in the world — with 100% anonymity.
As our conversation continued, I learned that the initiative plans to blanket the country with billboards, posters, and leaflets and to conduct a comprehensive social media campaign to engage the vital 18-44 demographic — a strategy completely new to the somewhat antiquated world of Swiss politics.
All this felt like it was going to be rather expensive for such a small campaign, but with the donation system certainly helping their chances, Stamm & friends embarked upon their fundraising venture; and, as I mentioned previously, their first move was a masterstroke.
Over the past several years, I have been extremely fortunate, through regular encounters around the world, to have found myself in a position to call Egon von Greyerz my friend.
Egon is a wonderful man with a keen intellect, a great sense of humour, and a code of ethics which is utterly above reproach. He is also now the “face” of the Swiss Gold Initiative to the gold industry.
I recently chatted with Egon about the progress being made, and what he had to say was fascinating:
Switzerland now has the opportunity to be the first country in the world with official partial gold backing of its currency. A currency backed by gold means the government and the central bank cannot manipulate the currency at will and print worthless pieces of paper that they call money. This would stabilise the real value or purchasing power of the Swiss franc. A currency with stable purchasing power leads to stable prices and promotes savings and investment rather than spending and credit. Officially Switzerland, like most countries, has a low inflation rate; but for the average person, consumer prices in the shops for food and other necessities continue to rise.
Even though the official Swiss inflation is low, there is massive inflation in some sectors like housing and financial assets. The money printing in Switzerland combined with artificially low interest rates have led to a major housing bubble.
Swiss housing prices are now unaffordable for most Swiss and in relation to income prices are now in an unsustainable bubble. An increase of Swiss mortgage rates from current 1-2% per annum to a more normal 4% could lead to major mortgage defaults and a housing collapse.
The Swiss have a history [of] putting some of their savings into the Vreneli, the Swiss 20 franc gold coin. In recent times, as spending on credit rather than savings has been the norm, the Swiss have bought less gold, but in spite of that they have more affinity with gold than most Western nations.
The Swiss gold industry is also very significant, since Swiss refiners produce nearly 70% of the world’s gold bars.
The most prolific savers in gold are of course the Indians, mainly by buying jewelry. But in the last few years China has been the biggest buyer of gold. There is a constant flow of gold going from the West to the East. This has created a shortage of gold in the West.
The government and SNB will be very concerned about the poll results and will intensify their propaganda concerning how bad this would be for Switzerland. But as you know, the Swiss are an independent lot and don’t like the government telling them what to do. It will be extremely interesting.
Interesting indeed.
The poll that Egon refers to is the next of those things that are making waves.
The official press launch of the SGI campaign was held this past week, with Luzi and his committee and Egon speaking to the Swiss media; but AHEAD of that launch, a poll was conducted in 20 Minutes, a popular German-language free daily newspaper published both in print and online.
The question asked was simple: “How will you vote in the upcoming Save Our Swiss Gold referendum?”
The results were a surprise to just about everybody — including Luzi and Egon.
A total of 13,397 people were polled from all across Switzerland on October 15, and the poll clearly demonstrated that already — without any campaigning — there is a solid block of voters inclined to vote FOR the initiative:

With the establishment being unable to actively campaign AGAINST the Initiative, all has been quiet for many months (which is why you probably haven’t heard anything about the SGI); but with the dawning awareness that this little campaign might actually grow some legs, a few members of that establishment have been getting a little antsy.
Firstly, last year when the proposal was tabled in parliament, we had this reaction:
( Switzerland’s upper house gave the thumbs down to a controversial proposal yesterday that would force the Swiss National Bank (SNB) to more than double its gold holdings by requiring the bank to permanently hold 20% of its assets in bullion — but the rule could still ultimately become law in a popular referendum later this year.
The “gold initiative”, the brainchild of the right-wing Swiss People’s Party (SVP), which also calls for SNB gold to be repatriated to Switzerland — much of it is currently stored in London, New York, and Canada — is slated for a public referendum after the SVP secured 100,000 signatures in support of the measures last year.
Switzerland’s political establishment, however, remains vehemently opposed, fearing a gold quota would severely undermine the SNB’s ability to carry out its mandate — and their case has been helped by the poor performance of the metal over the past year.
Speaking before the upper house yesterday, finance minister Eveline Widmer-Schlumpf warned the “credibility of monetary policy” would be “greatly impaired” if the floor was introduced. She also described gold as “among the most volatile” and “riskiest investments” on the central bank’s books.
The SNB took a $16 billion loss on its gold holdings last year as prices fell 30% — contributing significantly to a Sfr9.1 billion loss on total assets, as shown by data released by the bank today.
SNB governor Thomas Jordan has also slammed the idea, arguing it would severely restrain the SNB’s policy choices by restricting the flexibility of its balance sheet. In a worst-case scenario, he warned last April, the assets side of the SNB’s balance sheet would over time be largely comprised of unsellable gold, which could force the bank to turn to money creation to finance its expenses.
“For the SNB to fulfil its mandate at all times, its capacity to act in monetary policy matters must not be compromised by rigid rules on the composition of its balance sheet,” Jordan stressed.
It’s laughable, actually.
No word from the finance minister on the huge potential gains which were foregone when the SNB sold their gold at the lows (gains which, at today’s prices, would have been in the region of CHF 27.5 bn). No. We won’t mention those. Nor will we even bother to go anywhere near Jordan’s fears that the SNB might be “forced” to (GASP!) “turn to money creation to finance its expenses.
No. We’ll leave those well alone and instead visit a “dossier” opened by the SNB on its website a couple of weeks ago as the realization dawned upon them that the SGI won’t just “go away” if they don’t talk about it:
( ...Now, with less than two months until the vote, the central bank is intensifying its communication. It opened a “dossier” on its website yesterday where it will post materials outlining why it “reject[s] the initiative”.
“Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options,” [SNB Vice-chairman Jean-Pierre] Danthine explained.
“A telling example is our decision to implement the exchange rate floor vis-à-vis the euro... with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros but also to buy gold in large quantities.
“Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.”
Sometimes I think these people are completely delusional.
So, let me get this straight: gold is a relic which restricts your ability to do such vital things as... oh, I dunno, promise to print unlimited amounts of your currency in order to peg it to another, failing currency and thereby debase it by 9% in 15 minutes? Or it might mean the market doesn’t have complete faith that you might be completely relied upon to do really smart things like that?
Somebody. Please? Make it stop.
The Swiss establishment has been reliant upon the public’s ignorance in these matters, but now they are up against a formidable opponent in Egon von Greyerz. Not only that, but they can clearly see that, as elsewhere around the world, the public is fast becoming disenchanted with the status quo; and that is potentially very dangerous for these people.
What is important to understand here is that if the initiative passes it will be part of the Swiss constitution IMMEDIATELY — not in two years, as many blogs and websites are suggesting.

This means that the government and parliament cannot touch it. Only another referendum can change it. This is proper democracy for you.
The closer we get to the vote on November 30, the bigger this story is going to become, and the bigger it becomes, the higher the chance that the yes vote wins.
Should that happen, it will undoubtedly set off alarm bells throughout the gold market, as yet more physical gold will need to be repatriated and another sizeable, price-insensitive buyer will enter the marketplace.
Curiously, as awareness of this initiative has risen in the last month or so, two strange things have happened in the gold markets, one in the murky world of central bank gold operations, the other in the equally murky world of China’s Shanghai Gold Exchange.
Firstly, the Russian central bank (which, unlike its Western counterparts, happily publishes its dealings in the gold market for the entire world to see) made its biggest monthly purchase in 15 years in September when they purchased 1.2 million ounces:
While in China, withdrawals from the Shanghai Gold Exchange suddenly spiked to 68.4 tonnes (the third-highest level on record):
Do either of these moves have anything to do with pre-positioning ahead of the Swiss referendum outcome? I have absolutely no idea.
What I DO know, though, is this:
Most people have written the SGI off as a sideshow of little consequence. Most people assume that it won’t get passed. Most people assume that, if it IS passed, it won’t make any real waves.

I think most people are wrong.
I think there is a VERY good chance the motion will get passed; and I think that, when it does, it will spark calls for similar actions in neighbouring countries such as Austria, for example, or maybe the Netherlands.
I also think that the physical gold market is far too tight to be able to handle any sudden widespread demand for large-scale repatriations of gold.
This story is going to be getting more attention in the coming weeks. Already, Rick Santelli has spoken about it on CNBC, and so has Eric King in a tremendous interview (which you can listen to here), and this is only the beginning. More polls will follow, as will increasingly desperate rhetoric from the SNB.
Amidst it all, calm and confident will be my friend Egon and the tenacious Herr Stamm.

Don’t bet against them.
The official website for the Swiss Gold Initiative is here:
And if you’d like to make a completely anonymous donation in any amount to help the initiative fund their campaign to restore sound money at the heart of Europe, then click HERE.
At the top of the page, you’ll see a button marked “Donate.” (I’ve done it and it’s easy — oops, there goes my anonymity.)
Oftentimes, it’s movements like the Swiss Gold Initiative that cause ripples which change things for the better, and I have a feeling that the time is ripe for an unexpected outcome.
Either way, I think you’ll be seeing a lot more of this little piggy in the days and weeks to come.

A New Macroeconomic Strategy

Jeffrey D. Sachs

OCT 23, 2014  

Solar renewable energy

NEW YORK – I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth.

The core challenge of macroeconomics is to allocate society’s resources to their best use. Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing.
It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. There are two ways to invest – domestically or internationally – and the world is falling short on both. 
Domestic investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience).
The neo-Keynesian approach is to try to boost domestic investment of any sort. Indeed, according to this view, spending is spending. Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. When investment spending does not budge, they recommend that we turn “excess” saving into another consumption binge.
Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation. They have tried that on several occasions in the US, most recently during the George W. Bush administration. Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.
Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality is a significant decline of investment as a share of national income in most high-income countries in recent years. According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013.
In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation). In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.



The Return of Volatility Is Mainly About Monetary Policy

This month’s wild market swings show there is no smooth exit from QE3.

By Niall Ferguson

Oct. 24, 2014 6:54 p.m. ET        

Four weeks ago I was in London at a conference organized by one of the biggest U.S. banks. The program included a session with the dread title, “2014, The Death of Volatility?” As it followed a rash of similar presentations and articles this year—“The Strange Death of Volatility,” “The Day Volatility Died” and the like—I knew from experience that a spike in volatility was imminent. And sure enough, since the end of last month, financial markets around the world have gone from gliding up an escalator to riding a bucking bronco.
After trending downward from around 20 two years ago to a low of just above 10 on July 4, the CBOE Volatility Index, commonly referred to as the VIX, leapt above 30 on Oct. 15. At its lowest point, the S&P 500 was down more than 7% since the mid-September peak. Perhaps most alarmingly, long-term interest rates plunged—at one point the yield on the German 10-year Bund fell as low as 0.72%, a truly Japanese number. So much for the death of volatility.
Like “this time is different,” “the death of volatility” is one of those combinations of words that act as a thought suppressant. It first came into circulation, according to Google , in December 2005 and appeared in at least eight published articles, and many more unpublished research notes, in the following two years. Then came financial Armageddon.
Understandably lying dormant for most of 2008 to 2012, the death of volatility then made a huge comeback. In 2013 the phrase appeared in 19 articles; this year in no fewer than 72.
I do not mean to imply that we are again on the brink of disaster. Every month, according to data for U.S. equities going back to 1793, the probability of a greater-than-5% decline in the S&P 500 is roughly 1 in 14. And now, as many commentators were quick to point out—after the fact—we were “due” a correction. Financial markets could hardly ignore indefinitely the disappointing data on growth coming out of Europe and China, or the growing geopolitical risks in the Middle East and the public-health panic about Ebola.
Yet those who make a living by making retrospective causal guesses about what moves financial indexes should beware. For I suspect that the return of volatility has relatively little to do with poor growth data or political turbulence. Instead, it is mainly about monetary policy.
Since 2008, central banks have been conducting a colossal experiment. The federal-funds rate has been at the zero lower bound and the Federal Reserve’s balance sheet has increased by a factor of nearly five, to around $4.5 trillion. The Bank of England has pursued broadly similar policies, though its balance sheet stopped growing at the end of 2012 and is now on a plateau at around £405 billion, five times above its pre-crisis level.
However, central bankers in London as well as Washington have been talking for more than a year about ending their asset purchases and raising interest rates. Next week the Fed is widely expected to announce the end of the third of its programs of “quantitative easing,” QE3.

Meanwhile, the most recent “dot plot” published by the Federal Open Market Committee—which depicts where members think the federal-funds rate will be in the future—indicated that only two participants expect it to stay at zero next year, while seven members expect it to be 3% or higher in 2016. That implies significant monetary tightening at a time when growth projections remain stuck in the 2%-3% range and the unemployment rate is falling at least partly because of declining labor-force participation.
A vocal contingent of journalists including Joe Wiesenthal and Josh Barro has declared victory on the Fed’s behalf, arguing for example that falling inflation and the even worse economic performance of the eurozone prove that QE has worked in the U.S. This ignores two things.
First, there is no agreement among economists about how QE works. Since it was implemented, academics have studied its effects on liquidity, the “term-premium” (the difference between the interest on a long-term bond a short-term one) and the exchange rate. The jury is still out.
Second, such an unconventional monetary policy cannot credibly be pronounced a success until it is brought to an end and the financial and economic system returned to normal.
Those of us who worried about inflation back in 2010 clearly jumped the gun. As Nobel laureate Tom Sargent and fellow economist Paolo Surico have argued in the American Economic Review, current policy could lead to inflation only if monetary policy “accedes to persistent movements in money growth by responding too weakly.” Why might that happen? Because, as Carnegie-Mellon economist Marvin Goodfriend pointed out in the Journal of Monetary Economics, current monetary policy has fiscal and distributional consequences that could make it addictive from the point of view of finance ministries and investors.
Even if those temptations are resisted and inflation remains dormant, there remains the bigger problem of financial stability. QE offers a “tradeoff between more stimulus today at the expense of a more challenging and disruptive policy exit in the future,” as the authors of a recent paper, put it.
“Stimulus now is not a free lunch, and it comes with a potential for macroeconomic disruptions when the policy is lifted.”
At the annual meeting of the International Monetary Fund in Tokyo in 2012, the Governor of the Reserve Bank of India Raghuram Rajan and I warned that the exit from QE would be much less easy than the Fed was then claiming. Like the “taper tantrum” of summer 2013, this year’s October volatility has shown that there is indeed no smooth way out.
Last week, as last year, it did not take long for the central bankers—led by St. Louis Federal Reserve Bank President James Bullard—to step in. “A logical policy response at this juncture may be to delay the end of the QE,” he said on Oct. 16. “We could react with more QE if we wanted to.” The Bank of England followed suit. Down went volatility. QE . . . D. Next time, call that talk “The Suppression of Volatility.”
Mr. Ferguson is professor of history at Harvard University and the author of “The Great Degeneration: How Institutions Decay and Economies Die” (Penguin, 2013).

Markets Insight

October 27, 2014 5:56 am

Europe must act now to avoid ‘lost decade’

Scott Minerd

None of the tools currently on the table will get the job done

European Central Bank Governor Mario Draghi speaks at a news conference during the World Bank/IMF annual meetings in Washington October 11, 2014. REUTERS/Joshua Roberts (UNITED STATES - Tags: POLITICS BUSINESS)©Reuters
Investors’ confidence in ECB president Mario Draghi has taken a knock in recent months
In recent conversations – whether with the US Federal Reserve, the European Central Bank, the US Treasury or the International Monetary Fund – one theme is playing large and loud: things in Europe are bad and policy makers appear already to have fallen behind the curve. Quantitative easing in Europe is coming, but too slowly to avert a severe slowdown and perhaps even a hard landing.
The depreciation of the euro, while welcome, will not be enough to lift the economy out of the doldrums and more must be done both in terms of monetary policy and fiscal reforms. The European Investment Bank stands ready to support infrastructure investment, but at a scale that currently appears too small to make much of a difference.

In the meantime, the ECB will work as quickly as it can to expand its balance sheet. The problem is simply that there may not be enough assets to buy. Mario Draghi, ECB president, has made it clear that the ECB must increase its balance sheet by at least €1tn – a tough mandate as the balance sheet will continue to shrink in the coming year as the earlier longer-term refinancing operation (LTRO) assets roll off. The reality is the ECB will need to purchase at least another €1.5tn in assets, and even that may not be enough.
The much heralded asset-backed securities purchase programme will only yield about €250bn-€450bn in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500bn-€750bn to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate and the matter would probably end up in the European courts.
The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

How is this affecting the markets? The recent rally in US fixed income is materially different than when rates last approached 2 per cent. Previously, the Federal Reserve was actively managing the yield curve to reduce long-term borrowing costs in order to stimulate the economy. The current rally is caused by a massive deflationary wave unleashed upon the US by beggar-thy-neighbour policies in Europe and Asia.


Continent's Drift

The Conflict Between Germany and the E.C.B. That Threatens Europe

Neil Irwin

OCT. 24, 2014

We’ve known for some time about the tension between the European Central Bank, charged with guiding the economies of the 18 countries that use the euro, and Germany, the largest and richest member of that zone. A news report sheds light on just how dysfunctional that relationship has become.
It’s not an overstatement to say that the future of Europe depends on how this conflict is resolved.
Mario Draghi, the E.C.B. president, is barely on speaking terms with Jens Weidmann, the president of the German Bundesbank (and a member of the E.C.B.'s policy-setting governing council), Reuters reported Thursday. When Mr. Draghi dispatched a deputy to Berlin to visit aides to Chancellor Angela Merkel, the message received was that vocal German attacks on the central bank were unlikely to end anytime son.

The central issue is that Mr. Draghi and the E.C.B. see Europe as being on the cusp of a triple-dip recession. Europe is also at risk of getting stuck in a cycle of very low inflation and stagnant growth. Inasmuch as it has already cut short-term interest rates to zero (below zero, even), the bank is considering doing an American-style program of quantitative easing, or buying vast sums of bonds with newly created euros, to try to avert this fate. It is also encouraging Germany and other European nations to loosen the purse strings a bit and pursue fiscal policy that is more supportive of growth.   

Germany's chancellor, Angela Merkel, and the European Central Bank president, Mario Draghi, right, on Friday in Brussels. Mr. Draghi would like Germany to pursue fiscal policy that is more supportive of growth. Credit Christian Hartmann/Reuters       

In Germany, by contrast, both elected leaders in Berlin and central bankers at the Bundesbank in Frankfurt view the worry over deflation as overwrought, the need for fiscal probity as critical, and any effort to print money to buy government bonds as the pathway to hyperinflationary perdition.
It’s worth adding that most everybody on this side of the Atlantic, the International Monetary Fund and the United States government, for example, is on Team Draghi in this dispute. Indeed, the widespread view among economists in the United States and Britain is that the risks facing Europe are grave and that the need for easing both monetary and fiscal policy is urgent.
So why will this dispute determine the future of Europe? Because Mr. Draghi is steering through Scylla and Charybdis, with radically different outcomes for Europe on either side.
If Mr. Draghi and the E.C.B. take insufficient action and the eurozone economy indeed stagnates or falls into a long recession, it could mean a lost generation of Europeans living with high unemployment and declining living standards. We can’t know for sure whether Europeans would react to this outcome by being content to muddle through, or if they would elect radical politicians who might endanger the era of a Europe united around liberal democratic ideals. So far Europeans have been O.K. with muddling along amid high unemployment, but it’s a really bad result either way.

Op-Ed Contributor

The Land Grab Out West

ALBUQUERQUE — LIKE a rerun of a bad Western, the battle over ownership of America’s public lands has revived many a tired and false caricature of those of us whose livelihoods and families are rooted in the open spaces of the West.
With a script similar to one used last spring by the Nevada rancher Cliven Bundy, a small contingent of opportunistic politicians is vowing to dispose of America’s national forests, conservation lands and open space. You may remember Mr. Bundy, whose refusal to pay more than $1 million in overdue grazing fees instigated a dangerous standoff with law enforcement officials. The confrontation made him the face of what some say is a renewed Sagebrush Rebellion to turn over America’s public lands to state control.
Mr. Bundy does not represent the West, however. And the campaign to transfer to the states or even sell off our shared lands should not be mistaken for the mainstream values of Westerners whose way of life depends on the region’s land and water.

Utah was the first state to embark on this course. In 2012, the state’s Republican governor, Gary Herbert, signed a law demanding (though unsuccessfully so far) that the federal government transfer to the state more than 20 million acres owned by United States taxpayers. This included national forests and grasslands and such jewels as Lake Powell and the Flaming Gorge National Recreation Area.
In turn, the legislatures in Idaho, Montana, Nevada and Wyoming have created task forces to study the idea, though similar efforts in Colorado and my home state of New Mexico have thus far failed.
Proponents argue that states are better equipped to manage the West’s natural wonders than the United States Forest Service and other national land management agencies. What they don’t say is that their proposal would raise the possibility that some of the lands would be turned over to the highest bidder and that Western taxpayers would be saddled with the costs of overseeing the rest.
Tellingly, while the Utah legislation excluded national parks and wilderness areas from lands that would be transferred to the state, the 1.7 million-acre Grand Staircase-Escalante National Monument was not excluded. That may have something to do with a 1997 report by the Utah Geological Survey that concluded that Grand Staircase-Escalante “includes some of the most energy-rich lands in the lower 48 states.”
The costs of managing these lands could bankrupt state governments. Over $3.9 billion was appropriated for federal wildfire management alone for the 2014 fiscal year. The only way states could foot the bill for administering America’s public lands would be to raise taxes or sell or lease large expanses to developers and other private interests, including oil, gas, timber and mining companies.

This would also result in a proliferation of locked gates and no-trespassing signs in places that have been open to the public and used for generations. This would devastate outdoor traditions like hunting, camping and fishing that are among the pillars of Western culture and a thriving outdoor recreation economy.
Like many New Mexicans, my 11-year-old son and I just returned from an autumn elk hunt on national forest land. The bull elk that we brought home will feed our family for most of the coming year, but the experience of backpacking into the high country, sleeping on the ground and hearing the elk bugle around us will feed my son’s imagination for years to come. If these lands end up in private hands, there is no guarantee that we will be able to go back year after year with the open access that Western sportsmen cherish.

These types of land-grab schemes are as old as the railroads. But the chief salesman for this latest land seizure campaign, the American Lands Council, is having some success pitching state legislators on “model legislation” to enable these transfers. The legislation was drafted with the help of the conservative American Legislative Exchange Council, which receives financing from the utility industry and fossil-fuel producers.
It is unclear whether such legislation is even enforceable.

Still, even the Republican National Committee has bought the snake oil the American Lands Council is selling. Last January, the committee endorsed the transfer of public lands to the states. In addition, the United States House of Representatives, controlled by Republicans, endorsed the outright sale of our public lands.
Like other Westerners who value our shared lands as assets to be used, enjoyed and passed to future generations, I find this dispiriting to see. And for an overwhelming majority of public land users in the West who pay their grazing fees and play by the rules, the so-called Sagebrush Rebellion of Cliven Bundy and the American Lands Council is not so much a movement as another special-interest-financed boondoggle.
Admittedly, the federal government does not do a perfect job of managing America’s public lands. There are real problems that need to be solved, like creating more access points for recreation, hunting and fishing, as my colleagues and I are proposing to do with a bill I introduced called the HUNT Act. But these are problems we can solve because of the very fact that these lands are public and we each have a voice in their management. America’s forests, wildlife refuges and conservation lands are part of the fabric of our democracy. Let’s keep them that way.