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Dec.
18
2014

Gold that does not glitter

Not the result of the referendum on the increase of the gold stock held on Sunday, but another – also held on Sunday – can affect the exchange rate of the Swiss franc and through it, the euro as well, states the founding chief executive officer of the ACT Currency Partners, a distinguished wealth management and consultant Swiss company specialized in foreign exchange market operations. According to Felix Adam – who used to work at Citibank, Vontobel and other renowned banks as an executive officer before in 1992 founding his own company in Zurich – if the initiators of this referendum succeed in their plan to restrict the annual settlement permits to its fifth, then the Swiss national economy will face withering and the Swiss franc will be under pressure.

In the interview, Felix Adam thinks there is only a slight chance of accepting the referendum that received worldwide attention because it is about whether the Swiss central bank must double its gold stock. However, he thinks if the country has to start buying large stocks of gold, it would not set an example to other banks, and hence it would not make a significant difference in the international gold market and would not put the Swiss franc under pressure. According to the currency specialist, in Switzerland, the fear of the cash, including Swiss franc, losing its value is arising and it seems to be behind the scenes.

Péter Zentai: Do you personally support that the central bank of you country is doubling its gold stock?

Felix Adam: I disapprove of it. For professional reasons and by this referendum the independence of the central bank of Switzerland might become an issue. It is absurd that any complex action which affects national economy and the future of the Swiss franc is entrusted to everyday people. My main doubt is more ideologically significant: the size of the gold stocks of Switzerland can only depend on decisions of the Swiss National Bank and no one else. Not even the people of Switzerland.

If the people of Switzerland decide on 30th November that the Swiss National Bank must double the gold portion of reserves of their country from the current 7.5 percent and in the upcoming years it has to be increased to 20 percent, then what will happen to the Swiss franc and the price of gold on the global market?

I am not expecting lasting changes in the exchange rate of the Swiss franc or in the price of gold either. The Swiss National Bank holds half of the 522 billion Swiss franc reserves of the country in Euros. A couple of years ago we linked the exchange rate of Swiss franc to euros and set the 1 euro / 1.20 Swiss franc rate. This is working and will keep working. In the case of mandatory significant gold buying, the euro-franc rates will not be affected. It is a whole other issue that the dollar would become stronger compared to the Swiss franc and via it, compared to the euro as well. But after that, we would return to reality.

What is the reality in the dollar-Swiss franc-euro relation?

The reality is that the dollar will become stronger. We are expecting that next year 1 euro will be worth only 1.15-1.10 dollars. I must tell, we are quite sure about that. Thus our franc will keep declining against the dollar.

And those who initiated the referendum are watching this – obviously with worry…

You are right. Not only here, but everywhere in the world, common people are watching blindly the major market developments. In addition: 90 percent of the Swiss have no idea what it would mean if their country increased its gold reserves significantly. Many people accept the unscientific propaganda of political initiators that years ago the central bank sold off the wealth of its county, meaning a part of its gold stock and now they are only taking back their gold.
However, it cannot be left without a word that not only layman but experts like me cannot predict the local and global consequences of world of zero interest rates where banks have not paid and probably will not pay any interest rates.
There is no precedent in economic history for such situation so for wealth managers, bankers, politicians, and simple people as well, this is such a challenge they cannot really handle.
I object the initiation of this referendum, but I do understand its supporter’s fears.

Maybe people are afraid that soon an inflation bomb will explode?

People have no idea; the majority does not even know what the difference between deflation and inflation is. However, the Swiss sense an uncertainty that they have never before.

You have not answered that how you expect the world market price of gold would change if referendum is accepted.

Probably the price would jump 5-10 percent. Compared to the current one, the price of noble metals per ounce could increase by 100-120 or even 150 dollars. I predict that after a couple of weeks, one or two months, restoration would commence and the price of gold would decrease again. However, I have no doubt, after that – though I do not know when – a new turnaround would happen: the new tendency would be the increase of gold’s price.
But we do doubt that if the Swiss Central Bank was forced to purchase, other banks would follow and start doing the same which would lead to a price-turnaround within a short time.

How much gold do you keep in your portfolio? Do you own any gold?

We hold and I hold as well. We laid down a 10 percent gold portion in our portfolio.
It is not wise to give up on gold; every wealth manager needs it because gold serves as a security ‘puffer’. Like it or not, we must prepare for – not likely to happen, but not possible to rule out – a scenario where cash – dollar, yen, euro, and even Swiss franc – would devalue significantly since nothing is known about the long term impact of the zero interest rates on cash.

Which currency do you trust the most?

I am Swiss – but not only for that reason –, so we keep mostly Swiss franc. Behind that, there is our fear that in two or three years the marriage between the Swiss franc and the euro will be split up. Problems endangering the unity and stability of the euro are not over. The dollar is strong and stable, but – as seen many times – it can fall quite suddenly. In such cases, the Swiss franc is the last refuge in the world of cash. We also greatly value and believe in the stability of Norway, its economy and politics. That is the reason why the Norwegian krone is in our second place. The dollar is the third and the euro is the fourth.

Do you think the ‘yes’ votes will win on the ‘gold’ referendum?

They will be the minority. Sixty percent of the votes will support the independence of the national bank to decide whether it will buy gold or not.
At the same time, I would like to call the attention to the result of the other referendum on Sunday which is more important in terms of the franc and the future of the Swiss economy in general. Namely, whether to reduce to its fifth the number of foreigners allowed settling down. The unprecedented control of immigration and settling down are at stakes, even if the initiators of this referendum came up with ecological and nature-preservation viewpoints. They say: by the dramatic increase of population – within decades the population of the country would actually double – the natural values of Switzerland are being eroded, and this process must be stopped. If those who want to stop immigration win, the efficiency of the Swiss economy will decrease gradually. It has been obvious that the majority of those who settle down in Switzerland contribute to the steady increase of GDP not only as a consumer – for instance ensuring the stability of the real estate market -, but also as a creative labour and an investor creating workplaces. So far this rate of immigration has not weakened but rather strengthened our national economy and kept stable the Swiss franc. Not to mention that the Swiss society is growing old and limiting immigration would cause problems.
I anticipate: any result of the ‘gold referendum’ would not affect the stability of the euro-Swiss franc rate as much as the winning of the immigration-stop supporters. In that case markets would put pressure on the Swiss franc…