Switzerland and gold

From May 1997 through to October 1997 financial turbulence in South East Asia brought a great deal of nervousness to global markets and – as often used to happen before the theme of “Gold is Dead” became the anthem of the “New Economy” – scared investors turned to the safest of safe havens, gold.

Despite demand exceeding supply from gold producers and from scrap input, the gold price had been falling for 18 months, aggressively assisted by the bullion banks that had been promoting short sales from speculators and forward sales by producers, such as Barrick, Anglo American Gold and practically every Australian gold mine. But the weaker trend suddenly reversed and the gold price improved from below $ 320 to touch $ 340, thereby creating panic among those who have shorted gold. And perhaps also the people who have been betting on a strong dollar policy to keep the American Dream Economy on track.

Out of the blue came a press release from the Bank of Switzerland that in just about a one sentence statement announced that they would be selling half the Swiss gold – a more than substantial 1300 tons – in order to raise funds for humanitarian purposes. That simple statement of intent brought the gold price to a dead stop and then a steep fall.

Only later was a more complete statement released. It then became clear that the Swiss would first have to modify their constitution before such a step could be considered and even then it was likely to be challenged through a referendum. The earliest start date for the sales, if they were properly authorised, would be during 2001 – almost 4 years after the announcement.

But the damage was already done. Buyers retreated from the market and the gold price fell steeply to just above $ 300/oz. When the central banks of Australia and the Argentine also announced that they had already sold part of their gold reserves as long as 9 months earlier, the crisis for the short sellers was averted and short selling could resume. It was not very long before gold fell below $ 300 for the first time really since 1979.

Switzerland changed their constitution and no referendum was called on the matter of selling their gold, although the humanitarian purpose picked up a lot of resistance. A week ago a referendum finally put paid to the idea of using the money to help those in need and now the money is lying in the kitty while the Swiss debate for what purpose it is to be used. Which, of course, means that there is no pressure to add to that amount by further selling of gold.

However, the Swiss are also party to the Washington Accord – the agreement reached between European Central Banks in September 1999 during the World Bank meeting in Washington – that limited sales of gold by these central banks to 2000 tons over a period of 5 years. The 2000 tons included the 1300 tons the Swiss had wanted to sell.

Swiss authorities made it very clear that they would not follow the British example and turn the gold sale into a circus. The intimated they would sell small quantities without prior announcement in order to avoid rattling the market and would only give statistics on sales after the event. So far, sales averaged about 1 ton per day, or about 20 tons /month and they have sold well over 600 tons with little noticeable effect on the market.

It came as a bit of surprise therefore that they announced on Wednesday, 25th September, out of the blue – again! – that they intended to sell 283 tons of gold before the end of the month! Against their policy and against the previous gradual pace of selling they find it necessary to trumpet out what they INTEND to do, not what they have already done.

Now as coincidence will have it, the gold price was again – just as in 1997 – showing signs of exuberance, threatening to move higher from the $ 320 base to break above the key resistance levels at $ 325 and $ 330. Could that have been the reason for the ‘hasty’ Swiss announcement on Wednesday? Just as it seems to have been in 199?

Yet this time the gold price did not collapse by $25 in the wake of the announcement – it slipped by only about $5, well within the recent trading range. And if the market can absorb that news and also survive very determined selling in New York during the rest of the week with only brief dips to below $ 320, it might just be that this week could show some fireworks on the gold front. Particularly if Wall Street extends Friday’s subsidence to set new post-top lows.