LONDON — Switzerland’s decision to peg the erstwhile safe-haven franc to the euro may finally give gold bugs the chance to see prices hit the once-unimaginable US$2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades.
The Swiss National Bank shocked global markets on Tuesday by saying it would buy unlimited quantities of foreign currencies to prevent the franc from rising above 1.20 Swiss francs to the euro , as it fights to contain the meteoric rise of its currency that threatens its exports and economy.
By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation.
It has also impacted the Swiss currency’s status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said.
“All in all, Switzerland is now on a quantitative easing policy in the foreign exchange markets,” said Peter Fertig, a consultant for Quantitative Commodity Research. “If the Swiss franc is no longer a preferred safe haven due to intervention by the SNB, it will have (a positive) impact on the demand for gold.”
Much of gold’s rise this year – it is currently up 34 percent since January, on track for its largest yearly gain since 1979 – has been fuelled by cheap cash, provided chiefly by Western central banks battling debt piles large enough to derail global growth.
Even without the SNB, the deterioration in the euro zone debt crisis and the U.S. economy’s inability to create a single job last month had already prompted many analysts to upgrade their gold price targets this year.
The $2,000 mark is now coming clearly into view — though its sustainability at that level is unclear.
“$2,000 is just another number. There is no reason why it can’t go through that, can’t go a long way through that,” said Natixis strategist Nic Brown.
“This explosion in liquidity creates demand for gold and creates the perception for gold prices to go higher,” he said. “But ultimately, this is a bubble fuelled by liquidity.”
Adjusted for inflation, gold already hit $2,000 an ounce in October 1980. In 1980s money, Tuesday’s record high gold price of $1,920.30 an ounce is only worth $720.
But its rally is impressive nonetheless, with the metal set to end September with its twelfth quarterly gain in a row, its longest such winning streak in at least 30 years. Switzerland’s move is just the latest piece of supportive news for the metal.
“I think gold is headed for $2,000. In theory, this could happen in a matter of days,” said Frank McGhee, head of precious metals trading at Chicago’s Integrated Brokerage Services.
“In reality, if this type of intervention action was taken and was ultimately seen to be ineffective, then the market will get new strength from that.”
LAST SAFE-HAVEN?
Gold is part of the family of safe-haven assets, such as top-ranked government debt and, until now, the Swiss franc, so named for the reassurance they offer investors when markets become unstable.
With U.S. Treasuries stripped of their triple-A status in August by Standard & Poor’s, German Bunds wavering as investors ponder the cost to the euro zone’s richest economy of bailing out its neighbours, and the Swiss franc now shackled to the euro, gold is viewed by many to be the last safe haven standing.
“We’ve seen U.S. Treasuries have their reputation as ’risk-free assets’ damaged, now we’ve got the Swiss franc subject to substantial and ongoing intervention by the SNB, so yes it does strengthen gold’s claim as a safe-haven,” said Credit Suisse analyst Tom Kendall.
“Prior to this announcement, I was among those who thought we needed to correct a bit from the $1,910 area and was looking for a short-term correction,” he said.
“But I think given this, and in light of the ongoing pressures from the European interbank funding market … I don’t see any real barrier to gold moving above that $1,920 mark.”
Aside from investor concern over the stability of the economies backing currencies such as the U.S. dollar, the euro, the pound or the yen, the growing desire among emerging market central banks to diversify their foreign exchange reserves has been a major supporting factor for the bullion market.
The most recent data from the International Monetary Fund shows the world’s central banks have bought some 200 tonnes of gold this year, led by Mexico, Russia and South Korea. Investors in exchange-traded products backed by physical gold have increased their holdings by a net 75 tonnes in 2011.
The Swiss National Bank’s “shock and awe” decision may prompt even more of this kind of investment.
But not everyone buys into the argument for gold as a refuge, with some investors, particularly those with shorter time horizons, pointing to recent volatility in the gold market as a reason to be wary. Gold traded in a greater than $300 range in August, its widest one-month spread in real terms since 1980.
“Safe means stability. What we’re seeing in the gold market is anything but stability,” said U.S.-based independent investor Dennis Gartman. “Anything that moves as gold has moved today — from $1,920 all the way down to $1,870 in a course of five minutes — is hardly safe.”
“That does not mean gold will not continue to draw capital,” he added. “It was high the last time it got to $1,900. Then it fell quickly to $1,700. It ceased being overbought at that time. It’s not overbought now.”
Financial Post
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