A Mad Referendum In Switzerland Could Permanently Warp The World's Gold Market

A bizarre proposal from a Swiss political party would have the country's central bank holding one fifth of its $547 billion of assets in gold, a move that could vastly increase risk during a financial crisis as gold prices are extremely volatile.

Case in point: Gold is currently tumbling. It just broke below $1,200 for only the second time this year.

But the Swiss Peoples' Party, whom you may remember from their previous - and successful - referendum proposals for a stricter immigration policy and the banning of new minarets thinks this a good idea anyway.

The party has organized a referendum that would force the country's central bank to buy thousands of tons of gold. A Swiss-wide vote is set to take place in exactly a month's time.

The Wall Street Journal lays out the details of the proposal:

• The Swiss National Bank would have to hold a fifth of its $547 billion of assets in gold
• The proportion it currently holds is less than 8%
• The Swiss National Bank wouldn't be able to sell gold
• All of the SNB's gold would have to stay in Switzerland

The referendum could very well pass based on recent polling, according to Reuters. In a warning, UBS economist Beat Siegenthaler told the news agency that the result could be "quite dramatic for the gold price, and maybe for markets beyond gold."

It's a popular trope that gold investors (sometimes known as "goldbugs") retreat to the precious metal out of fear of coming inflation, often an instinct brought on by interest rate cuts and quantitative easing.

So it's pretty funny that the new referendum would bring in a sort of QE for gold: As the asset (gold) price falls, the central bank would be forced to intervene again and again to buy more and more.

Sebastien Galy at Societe General explains that having its hands tied would not be good for the bank in the case of a crisis:

From a risk management perspective, a rule to maintain a 20% ratio of the Swiss foreign reserves in Gold is quite atypically Swiss. In times of crisis, it would vastly increase the portfolio's risk while vastly reducing its liquidity. This may not be seen as an issue as the Swiss franc has proven to be a safe haven historically. However, the case for a safe haven may be less clear 10 or 20 years down the road.

Galy goes on to show the policy would work in the favour of existing gold owners:

The new gold rule would be the equivalent of giving a large put to the market. Each time Gold collapses, the SNB would automatically buy gold so that the 20% reserves ratio is maintained, and this would presumably be achieved by mostly selling euros and dollars.