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Should the SNB Sell Its Gold Reserves?

20 October 2020


Gold as a pillar of currency stability – a philosophy still maintained by several important central banks across the world. Does it pass the reality test?


Gold has lost some of this year’s gains after reaching a record in August and, having lost momentum, it is out of the limelight. But, lest we forget, gold reserves and their gains helped the Swiss National Bank (SNB) post a profit for the first half.


However, this gain on the price of bullion is a book profit and the SNB is required by the constitution to keep some of its currency reserves in the form of gold. Hence, they are not meant to generate a profit for the bank, but serve simply to instill trust in the currency and the central bank as an institution.


Does It Help Stabilize the Currency?


But is gold still really an important factor in Swiss currency policy? The last major change to the role of gold in monetary policy and to the size of the bank’s holdings occurred at the beginning of the century. They came as a reaction to the formal abolition of the legal link of the Swiss franc to gold that was implemented on January 1, 2000.


Since the bank sold 1,300 tons of gold and later a further 250 tons (due to the rise of the price of gold that had led to an exaggerated share of gold in the currency reserves) in the early years of this century, the Swiss franc has actually appreciated very significantly, in particular against the euro, the main trading currency. It seems, that when the currency surges although the central bank gets rid of more than half of its gold reserves, the assertion about gold being a major pillar helping to stabilize the currency is missing the point.


Political Influence Matters

Other factors must play a more pivotal role than the size of gold reserves. The central banks of Turkey, Hungary and Russia in particular may need to reconsider their policy based on this reflection, according to a noteworthy study published by Germany’s «Handelsblatt» on Tuesday (in German). The three countries in recent years have bought substantial amounts of gold, hoping to shore up their currency and making it more waterproof to external shocks.


But their currencies suffered nevertheless, despite the gold purchases of the central banks, suggesting that gold (alone) won’t sustain a currency, but that other factors, not least political ones, play a much stronger role.


The English Precedent

Under these premises, gold has turned from being an important factor for monetary policy into being an asset class among many, much like equities or bonds.


The Bank of England at the start of the century took the radical decision and sold its gold reserves. Pound sterling emerged unscathed. It did plunge eventually, when voters supported a referendum on leaving the European Union – another sign that for reserve purposes, politics takes precedent over gold.