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The Swiss National Bank Abandons the Euro, Boosting Gold
The Swiss National Bank is pro-gold, after all. Last November, the Swiss central bank vehemently opposed three pro-gold measures that were coming to a national vote at the end of that month. As a result of the central bank’s logical arguments, the sensible Swiss turned down those three pro-gold measures on Sunday, November 30. Most traders expected gold to fall on that news, but gold began to rise that day.
Gold fell to $1168 on Friday, November 28, but it turned out that the market had already “baked in” the Swiss “no” vote, so when gold rallied, the shorts had to cover their positions, buying gold on the way up. Gold surged over $50 on Monday, December 1, and rallied to $1229 by December 10 before fading again.
The “Swiss Shock” Sends Gold to $1280
Last Thursday, January 15, the Swiss National Bank surprised the world again, by un-pegging its strong currency (the franc) to the euro. The Swiss/euro peg had been set at 1.20 francs per euro for over three years, since September of 2011, in order to protect the Swiss exporters and their vital tourist industry.
However, the Swiss couldn’t keep the European Central Bank (ECB) from destroying their own currency, so the Swiss acted in advance of an expected new round of euro Quantitative Easing (QE), likely to be announced this week, on Thursday, January 22, at the ECB’s monetary policy meeting in Frankfurt.
As a result of the Swiss Shock, gold shot up to $1280 on Friday. The London price setting was $1277.50, up 6.5% from 2014′s closing London price and up 8% vs. the 2014 closing price of $1183 in New York.
Meanwhile, gold is soaring in euro terms. With the euro falling to $1.15 on Friday, $1280 gold translates to a gold price of 1113 euros, up 27% from 873 euros at the end of 2013 and 995 euros at the end of 2014.
Late last week, holdings in the SPDR Gold Trust (GLD), the world’s largest gold exchange traded fund (ETF) shot up 1.4% to 717.15 tons right after the Swiss announcement.
That’s the biggest daily surge in GLD buying since the spectacular peak month of August 2011, when gold soared above $1900. By comparison, global gold funds unloaded over 160 tons of gold in 2014 and over 800 tons in 2013. Gold lost ground in both of those years – the first consecutive losing years for gold since the late 1990s.
Gold Benefits from Negative Interest Rates and Deflation
In addition, the world is careening toward deflation, which benefits holders of gold. Interest rates on major currencies are near – or even below – zero, giving gold a slight advantage in terms of income.
After last Thursday’s bombshell announcement, the Swiss National Bank also announced that they will charge NEGATIVE interest rates – a move to limit currency traders from sending cash into Switzerland.
The euro also charges negative interest rates, along with a declining principal in terms of most other currencies. The U.S. offers microscopic positive rates (zero to 0.25%), but is fighting deflation after two consecutive negative months of Consumer Price Index (CPI) readings. i.e., -0.4% in December, following a -0.3% drop in November. That works out to an annual rate of 3% deflation, reminiscent of the 1930s.
For all practical purposes, the Federal Reserve cannot raise interest rates in this environment. America already offers a positive return in a strong currency. Raising rates would only draw more money into the U.S. dollar, hurting our exporters, putting the brakes on a strong recovery and adding to our national debt.
Right now, some emerging market central banks (and Vladimir Putin) must be smiling. They had the wisdom to buy a lot more gold, while the “smart” investors in New York and Europe were selling gold:
Central Bank Buying in 2014 Should Top 300 Tons
Figures are not yet complete for 2014, but central banks likely added over 300 metric tons* to their net gold holdings through November. Ukraine sold some gold, but total central bank gold sales were dwarfed (more than 10 to 1) by central bank purchases, led by Russia, which bought a net 152.3 tons, bringing its total to 1,188 tons (over 38 million ounces). Iraq was next in line with 47.6 tons in gold purchases in 2014. In third placed was Kazakhstan, which bought gold every month of the year, through November, increasing its gold hoard by over 30% last year. Mongolia (#4) bought most of its gold late in the year, in November, when the price was at a four-year low. Rounding out the top five is Turkey, which now holds about 533 metric tons.* (*A metric ton is one million grams, or 32,150 Troy ounces, or 2,205 pounds.)
This chart from Casey Research (using IMF and WGC data) summarizes gold buying through November:
Most of the top 10 gold-buying central banks are “emerging markets,” relatively poor nations with high ambitions. They are trying to leverage their way into the major leagues with gold, a proven commodity worth more than nearly all paper currencies. For instance, Azerbaijan had virtually no gold two years ago, but no owns over 30 tons. Tajikistan nearly doubled its holdings last year, as did tiny Mauritius.
Gold’s annual lows in November did not dissuade these banks from adding more gold to their coffers. November was the month of highest demand last year. Now, with gold recovering strongly in early 2015, these central banker must be wondering why their richer central banking cousins in Europe didn’t follow their example. (If the European Central bank had added gold last year, the euro would not be so weak.)
P.S. Switzerland is one of only seven nations that hold over 1,000 metric tons of central bank gold. Russia is the newest member in that club. The others are the U.S., Germany, France, Italy and China. (The European Central Bank only holds 503 tons of gold.) This makes Switzerland the tiniest nation (by far) to hold over 1,000 tons of central bank gold, and this makes the Swiss franc the closest thing to a gold-backed currency in the world. That’s why it has grown from 23-cents in 1971 to over $1.15 today, up five-fold (+400%) in the 44 years since President Richard Nixon closed the gold window in 1971.
Gold May Surpass $1500 This Year – but Don’t Forget Platinum and Silver
Last week – before the surprise Swiss announcement – a Swiss-born analyst famous for his Barron’s forecasts predicted a 30% gold increase this year. (That would bring gold to the neighborhood of $1550 per ounce). On Tuesday, January 13, Marc Faber spoke at a Société Générale global strategy meeting in London, saying “I’m positive gold will go up substantially – say 30%,” Why? “My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens – I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum. That’s the only way. …”We simply have highly inflated asset markets. Real estate is high, stocks are high, bonds are high, art prices are high, and interest rates and short-term deposits are basically zero.” Faber concluded: “The only sector that I think is very inexpensive is precious metals.”
Notice his passing reference to silver and platinum. Platinum has not yet followed gold’s lead. In fact, platinum is trading slightly below gold – a rare opportunity to add platinum at an attractive price. Platinum is a hybrid metal – precious and industrial. It is particularly important in the auto industry, essential for catalytic converters. The price is down due to concerns about a global slowdown. If you believe, as we do, that the world will still grow by 3% or more in 2015, then platinum is a clear buy.
Silver is “gold on steroids.” In any major bull or bear market, silver usually rises (or falls) faster than gold. That is why silver is in such bad shape, falling from nearly $50 to below $16 (-68%) in the last three years, while gold has fallen only about 40% at its lowest point last November. On the upside, you will probably see a reversal of this trend, with silver outpacing gold on the upside. Since the November lows, silver is up 16% and gold is up 13%, but the silver advantage will likely grow if gold keeps rising.
Whichever metal you choose (why not all three?), 2015 is off to a strong start – thanks to the clueless European Central Bank (ECB), the macho Swiss National Bank and the fearful Federal Reserve. All the fundamentals are in place for a return to a precious metals bull market in the year (and years?) ahead.