Gold: A Six Thousand Year-old Bubble Revisited

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A recent report from Citi Research digs deeper in to the subject of gold, taking a historical perspective in analyzing the reasons underlying and the consequences of Switzerland’s “Save our Swiss Gold” referendum. Citi analyst Willem Buiter advances the argument that gold prices have been in a “bubble” for over 6000 years, given that the metal his little practical value, yet has been in great demand in almost every human society for thousands of years.

Some analysts have opined that if the Swiss initiative passed, gold prices would spike up more than $50 immediately. However, polling had showed that only 38% of likely Swiss voters polled supported the measure, which was voted down on Sunday.


“Save our Swiss Gold” referendum

On Sunday, November 30th, Swiss citizens voted in a referendum on a popular initiative ‘Save our Swiss gold’. If it passed, the initiative would have required: (1) the Swiss National Bank (SNB) to hold 20% of its assets as gold, (2) the SNB to repatriate the 30% of its official gold stock now held abroad by the Bank of England and Bank of Canada and physically hold all the precious metal in Switzerland, and (3) the SNB would not be permitted to sell any gold in the future.

Analysis of consequences if Swiss initiative had passed

Of major concern, if the initiative passed, the SNB would be required to purchase at least 1,733 metric tons to meet the 20% threshold by 2019 (based on end-of-September 2014 SNB balance sheet size). Of note, the current total annual global production of gold is just over 2,500 metric tons.

Buiter questions the logic of the second item on the referendum. He points out that keeping all of the physical assets in one place removes the benefits of geographic diversification in ‘custodial risk’.

He also notes that the third item on the Swiss referendum preventing the sale effectively devalues the entire reserve. “Item (3) is quite extraordinary because it would make the SNB’s gold holdings worthless. Making it illegal to ever sell any of the gold the central bank has now or acquires in the future and enforcing this gold sale ban effectively would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. The metal has no consumption value to the central bank. Its value is therefore zero.”

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