Is gold starting to shine once again?

15th October 2014

Martin Arnold, director of global FX & commodity strategist at ETF Securities comments on the upcoming Swiss Referendum explains how it could impact the gold price…

Gold is recovering alongside rising equity market volatility as a ‘flight to safety’ bid for US Treasuries has emerged. Weak data from Germany last week underscores the fragile state of the Euro area economy and bolsters the case for further easing from the European Central Bank, which may strengthen demand for gold as a monetary metal. At the same time physical demand for the gold is likely to see a seasonal lift from the upcoming Diwali celebrations in India (23rd October). The precision and timing of a bottom is difficult to predict, but the relative valuations of gold and the precious metals at current levels are quite attractive. With gold prices having fallen close to the marginal cost of production and speculative futures market shorts in the metal having risen close to all-time highs, last week’s bounce could trigger a short-covering rally helping to sustain momentum in the upward trend.

Further out, Swiss voters will decide whether or not to stop the Swiss National bank (SNB) selling gold, force the central bank to hold 20% of foreign reserves as gold and to repatriate all Swiss gold from foreign central bank vaults. While the probability of the referendum passing is low, it is not impossible that it will be pushed through. Clarity around the likelihood of it passing will increase as we get closer to the 30 November voting date. However, given the potentially significant impact the event would have on the gold price, it is not something investors should ignore.

If the referendum is successful, the SNB would need to purchase at least another 1500 tonnes at current prices, equivalent to around 35% of total annual global gold supply (or around 50% of global mine production). Such demand would likely spur a significant and sharp gold price rise. Regardless of how far-fetched investors believe the chance of a successful outcome for the referendum, Swiss voters have already shown nationalistic tendencies already this year. In February, voters in Switzerland approved (by a narrow 50.3%) curbing immigration, ending the freedom of movement accord that had existed with the EU since 2002. Notably, the immigration referendum was also brought about by the same right-wing party, the SVP.

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