- A lower dollar resulted in gold prices bouncing higher…
- …while lower interest rate and inflation expectations supported gold as well
- The approaching Swiss gold referendum also gave support.
- But we remain bearish on gold going forward
Did a lower dollar support precious metal prices?
Precious metal prices have recovered since the end of last week. What are the main reasons for this? For starters, the dollar has given back gains despite the stronger than expected US retail sales data. There are some signs that the dollar rally is exhausted, because investors are strongly positioned for further dollar strength. This is reflected in the substantial net-long dollar positions in the futures market. A lower dollar is positive for precious metal prices as they all have a strong negative relationship with the dollar (see below).
Interest rate and inflation expectations played a role…
What is more, investors have reduced their expectations about Fed rate hikes in 2015 (see graph above). Interestingly, the strong US retail sales report was overshadowed by a larger than expected decline in the import price index. Last but not least, the recovery in oil prices on Friday eased concerns about deflation. These three forces together gave strong support to gold and silver prices. They have rallied by around 3% since Thursday’s close
…so did uncertainty about the Swiss gold referendum
On 30 November, the Swiss electorate will vote on the “Save our Swiss Gold” initiative. This initiative calls for three things:
1. The Swiss National Bank should hold at least 20% of its assets in gold. But it has 5 years to implement this (counting from 30 November).
2. It should no longer be allowed to sell any gold at any time
3. All of its gold reserves should be stored in Switzerland
If this referendum passes, the Swiss National Bank needs to take the following actions. For starters, it needs to repatriate the gold that is held at other central banks abroad. It holds 70% of its gold in Switzerland, 20% at the Bank of England and 10% at the Bank of Canada. This would mean that it needs to repatriate 30% of its gold reserves. Moreover, it would be obliged to hold 20% of its total assets in gold. Currently it has 1,040 tonnes of gold or around 8% of its total assets. To meet this requirement it should increase its gold reserves to 2,784 tonnes over 5 years. As a result, it would need to buy around 1,745 tonnes over 5 years or around 350 tonnes per year (also see our Switzerland Watch of 28 October).
The impact will likely be limited, though
A yes-vote will not alter the bear-trend in gold prices in our view. This is because we expect that there will be enough supply available in the market. In addition, investors will continue to sell gold in an environment of a rising US dollar and higher US interest rates. This will push gold prices lower. However, the sell-off in gold prices could be less severe in case of a yes-vote.