The Australian dollar price of gold has reclaimed $1400oz, up 4% for the year, as weakness in the local currency, which has fallen to just USD $0.85 cents, buoyed prices for domestic investors

In USD terms, prices have been range bound this week, trading either side of USD $1200oz, as the market digests a series of disappointing economic data releases from the United States, with one eye firmly on the pending Swiss Gold referendum, which will take place this weekend.

As a quick reminder, if the referendum does pass, going forward, the Swiss National Bank (the equivalent of our RBA) will be required too

• Take steps to increase their gold holdings to 20% of total reserves

• Repatriate all physical gold held overseas back inside Switzerland’s borders

• Cease all sales of gold bullion

As I mentioned last week, from the conversations I had with people in Switzerland when there earlier this month, nobody had even heard of this referendum, so it’s definitely not something that there is widespread knowledge nor debate about, though this may have something to do with the fact that the Swiss hold many of these referenda on an annual basis.

Alternatively, it could be that when I was there, many of the Swiss were all to anxious, looking forward to the Davis Cup Final, which was completed last weekend, with Roger Federer and Stan Wawrinka bringing home the cup with a victory over France.

Either way, whilst the referendum has the potential to alter the gold market in a substantial way, it does need to be stated that it’s not high on the priority list for average Swiss citizen, at least as far as I could tell.

My thoughts on the referendum

Broadly speaking, I am very supportive of the referendum, and of the idea that now is a prudent time for developed market central banks to increase their gold reserves.

With bond yields at record lows, the debts of those issuing said bonds at record highs, and currencies the world over in an almost constant state of debauchment, it is only prudent to increase holdings of gold, a tangible, finite monetary asset that is valued the world over.

Indeed, its not only the Swiss, but also the Reserve Bank of Australia who I’d like to see increase the national gold reserve, for we too only hold a paltry amount of gold in our national reserves, after selling the majority of it back in 1997.

Regarding repatriation, again in an era of elevated uncertainty it is merely prudent to store as much gold as possible in your homeland. Whilst many gold market commentators have been amazed at the difficulties Germany has had repatriating its gold reserves from the United States, Switzerland’s gold is actually held in Canada and England.

Security of gold ownership, even (or should we say especially) at a sovereign level was also in the news this week when the Dutch Central Bank announced that they’d quietly repatriated over 120 tonnes of gold from New York to Amsterdam.

This represents about 20% of their total gold reserves, and interestingly enough, the Dutch central bank stated that one of the reasons for the repatriation was to “have a positive effect on public confidence”.

Interesting that Western central banks are still well aware of the fact that when it comes to the public – generally speaking, they are likely to be in favour of the idea of gold ownership

The full (English translated) statement from the Dutch Central Bank can be seen here, and no doubt you’ll notice the bit at the bottom regarding the fact the  reason they moved some gold to England in the first place was because the RBA closed its gold vaults over a decade ago.

Maybe I should call Glenn Stevens and tell him all about our own private gold vaulting facility at Custodian Vaults – it is after all just a few minutes walk from the RBA’s head office ?

Whilst I am supportive of the first two components of the referendum, I must admit I’m not as big a fan of the third component, that being a ban on all sales of gold bullion sales.

If gold prices were to sky-rocket higher in the coming years (as I think they will), then it would be understandable that there could be circumstances where it makes sense to take some profits and minimise holdings.

Certainly it’s my hope that whilst many of our clients continue to take advantage of the buying opportunity in precious metals today, I also hope they’re wise enough to take advantage of the selling that will one day be on offer as well

Maintaining 20% of reserves in gold bullion as a minimum, with the majority, if not all the gold stored within your own country makes all the sense in the world to me, but this last part of the initiative is a little harder to agree with, as bullish on gold as I am over the coming years.

What could the implications be?

The most bullish interpretation of the Swiss Gold Initiative passing is that it will profoundly alter the landscape for gold investment, with the Swiss central bank needing to buy at least 1,500 tonnes of gold over the next five years, more than 10% of the roughly 13,500 tonnes of gold likely to be mined over that period.

Of course if the Swiss national bank also keeps printing Francs and expanding its total reserve holdings, then it will of course need to buy even more gold, so that it can maintain its 20% minimum holding.

There is a train of thought that were this to happen, other central banks will be forced to follow suit, sparking a central bank ‘gold race’, which will greatly increase total central bank buying, which is currently in the vicinity of 400-500 tonnes per annum, excluding China.

This line of thinking, along with arguments against the initiative by the Swiss National Bank, is captured in the following article, which appeared in the Guardian earlier this week.

Alternatively, there is a chance that a NO vote (which, according to the polls is more likely) could see gold and silver take yet another hit, with the gold price breaking back below the crucial support levels at USD $1180oz

I am not necessarily predicting that that will happen (though I’ll definitely buy some if it does), but the market is still precariously positioned right now, as this piece from Jesse Colombo discusses.

The graph below is also from Jesse’s article

Either way – it will be interesting to watch how the gold market moves in the next 24-48 hours leading into the weekend, and again on Monday morning next week.

Poor data in the United States

Before finishing this article, it’s worth quickly commenting on the latest economic data out of the United States, especially as the USD has been so strong of late, and the majority of market participants are predicting a strong US recovery into 2015, with higher interest rates from the Federal Reserve.

Apart from the Q3 GDP print, which beat expectations, it’s been all bad news out of the US this week, which should give pause to anyone getting over-optimistic about the strength and resilience of the US economy.

After all – in the past few days, we’ve seen

• Markit Services PMI - which captures business conditions in the services sector, fall to 56.3 points, down from 57.1 the previous month

• The housing prices index come in flat in September, vs. expectations of a 0.5% rise

• Consumer confidence fall to 88.7 points from 94 the previous month. This was a huge miss to expectations

• Mortgage applications fall 4.3% for the week

• Initial jobless claims rose to 313,000 overnight – much worse than expected

• Personal income growth came in at only 0.2%, below expectations

• Pending home sales fell 1.1% for the month of October

Finally, and perhaps most importantly, we saw another incredibly disappointing result for Durable Goods orders ex transportation, which fell 0.9% in October, versus expectations of a 0.5% rise

This is graphed below, showing the year on year change in durable goods orders ex transportation, and you can see how weak it’s been for the past few years, with a declining trend.

You can see more charts on this subject here

Needless to say, if businesses in America were genuinely feeling more optimistic about sales and the potential for headline growth, they’d be more inclined to invest more in new machinery, goods and the like.

So far, the data suggests there is still a lot of nervousness out there, and a lack of confidence to invest heavily.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This report was produced in conjunction with ABC Bullion NSW.