Swiss 'gold referendum' TODAY Sunday

Singapore (Nov 30)   Switzerland is heading to the polls on Sunday to decide if the country will return to the Gold Standard. Five million Swiss voters will decide on the Save Our Swiss Gold proposal.

The proposal would require the Swiss National Bank to hold at least 20 percent of its assets in gold, essentially putting a limit on how much money the central bank can print. In other words, Switzerland is deciding whether to return to the Gold Standard.

Economists do not agree on many things, but the Gold Standard is definitely one of them. Bank of Singapore's chief economist, Richard Jerram, said: "There was a survey from the University of Chicago. They surveyed 40 economists in the US, and 100% of them said the return to the gold standard is a bad idea. The only thing they disagreed about was that some of them thought it was just a bad idea, some of them thought it was a terrible idea."

Each economist might have a different list on why the gold standard would not work, but the basics are pretty much the same.

By tying money supply to how much gold central banks hold, it essentially takes away their ability to respond to a crisis. Hence, when the economy turns south, central banks would not be able to respond with measures such as quantitative easing. A recession can easily become a full long depression.

There is also the question of inflation. To gold bugs, the ideal world would not have any of it. But to economists, some inflation is good, and you create that by creating money at a pace - slightly faster than economic growth.

But if you have a Gold Standard and gold production cannot catch up with economic growth, prices will have to come down, creating what is known as deflation. In this situation, consumers would put off spending and companies stop investing - much like what happened in Japan for the past 15 years.

There are also practical questions for Switzerland. Firstly, where is it going to buy all that gold, and at what cost? Currently the central bank only has 7 percent of its assets in the precious metal. To meet the 20% target, it means the central bank will have to buy some $60b worth of gold within five years, and that $60b is at current prices. The real cost could be much higher.

Bank of Singapore's Richard Jerram said: "Everybody in the market is gonna know there's a forced buy out there, the price's gonna go through the roof, and it's gonna cost them a fortune. So basically it's gonna be a fiscal loss from Switzerland to the rest of the world through this shock to gold prices."

Secondly, there is the currency issue. Switzerland has pegged its franc to the euro to defend its economy. But if the central bank could no longer print money while the European Central Bank does, the peg would go and the franc will strength. The Swiss economy is, no doubt, going to suffer a painful adjustment.

Source: ChannelNewsAsia