The Gold Bubble Price and the Swiss Franc

Gold is one of the most popular commodity assets, as well as being the highest valued precious metal. The gold bubble, which refers to the high market activity it attracts, is a millennia old due to this popularity. The Swiss Franc on the other hand is one of the eight basic currencies that are widely used in the global forex market.

With this in mind, it is quite obvious that the value or price of one will without an iota of doubt have an effect on the other in one way or another, directly or indirectly. This article focuses on how this has been the case in recent times and how this has in turn had effects on the global forex market and economy.

The Beginnings of the Swiss Franc Value and the Gold Bubble Price

The forex market is subject to several market forces that are mostly beyond the control of financial institutions such as the Swiss National Bank (SNB).To compound matters, the bank recently enacted unsound policies that resulted in the ballooning of Switzerland’s balance sheet from 100 to 500 billion in just over five years so as to hold the Franc down against other major currencies. This value represented about 2/3 of the countries’ GDP.

 This situation was especially dangerous for Switzerland who over the years has been a poster child of good economic policies, with the franc having been on a constant appreciation against other currencies. This, combined with its largely export-driven economy made it one of the most dangerous economic situations ever experienced by any country since the Great Depression.

Compensatory Measures Taken

In the wake of this looming disaster that may have seen the collapse of the Franc, the Swiss people went on a referendum in an effort to tap into the gold bubble as an alternative to the paper currency. The November 2014 vote had a 3-point agenda on which the Swiss had to vote on:

• Returning the Swiss National gold held offshore back to the country
• Compelling the SNB to hold at least 20% of the their assets in nothing other than solid gold
• To prevent any further sale of gold.

With stiff opposition from both the Swiss government and the SNB, the Swiss people returned a ‘No’ vote thus maintaining the status quo at that time.

The Aftermath

Following the referendum results which prevented the widespread use of gold reserves, the SNB got a chance of taking other recovery measures to make the Franc more stable. The action it took was to remove the 1.20 EURCHF cap that had been set in late 2011- a time when the gold bubble had hit an all -time high. This made the franc fall below 1.0.

The move did not come without consequences. The value of gold once again soared as stock traders escaped the hit to hedge themselves against the losses resulting from the currency’s devaluation. Also, greatly affected were the Swiss manufacturing industries which experienced massive losses on their exports.