Switzerland and Gold

Small but wealthy. One of the most developed countries in the world, with the eighth-highest GDP per capita. The country of low taxes, banks, chocolate, watches, Alps and direct democracy. Switzerland. What are its links with the gold market?

Switzerland’s Gold Reserves

The official Swiss holdings are 1040 tons (as of June 2018), the seventh largest in the world (excluding the IMF’s stockpile). As percentage, gold accounts for 5.3 percent of Switzerland’s foreign reserves, more than twice as much as China holds. However, prior to year 2000, Switzerland held 2,590 tons of gold, making the country the world’s 3th largest official gold holders. But between 2000 and 2008, the Swiss National Bank sold off 1550 tons of bullion.

Swiss Gold Production and Trade

Switzerland ranks first in gold imports. In 2015, the country imported gold worth $70.7 billion, or about 30 percent of total gold imports. In 2016, Switzerland imported 2,716 tons, or 88 percent of the total annual world’s production. However, the Alpine country is also the biggest gold exporter. In 2015, Switzerland exported gold worth $72.4 billion, or one fourth of total gold exports. How so? Well, the country is truly the global hub for the gold industry. So although there are no Swiss gold mines, most of the gold produced in the world (more than two thirds) transits physically through Switzerland.

Swiss Gold Market

Switzerland is an important marketplace for physical bullion and thus a key player in the gold market with international significance. Together with the London gold market, the New York gold market, and Hong Kong market, it creates the core, while other gold markets are auxiliary. Switzerland is to gold like Bordeaux is to wine. It partially results from history: during the WWII the large amount of gold was stored in Switzerland and big banks decided to open their own refineries. Indeed, four out of the world’s largest gold refineries are located in Switzerland (Valcambi in Balerna, Pamp in Castel San Pietro, Argor-Heraeus in Mendrisio or Metalor in Neuchâtel). They are famous for high quality and exceptional grade of purity of 99.99 percent.

There is strong positive sentiment towards gold in Switzerland. Indeed, the Swiss abandoned the gold standard no earlier than in May 2000. Until that year, the Swiss franc had had to be backed by a minimum of 40 percent in gold reserves (this is why the Swiss franc has historically been considered a safe-haven currency). The price of gold in the Swiss francs behaved similarly to the gold prices expressed in the U.S. dollar or euro, as the chart below shows.

Chart 1: Gold prices in Swiss francs from 1979 to 2018 (monthly averages).

Swiss Economy and Gold

Switzerland has one of the most competitive, innovative yet stable economies in the world. Nevertheless, the price of gold typically neglects what goes on in Switzerland. Only sometimes the domestic developments affect the global financial market. Investors should remember that Switzerland is small but important country, due to the internationally recognized stability of the Swiss banking system and the franc, which is the key international currency and the well-established safe haven.

For example, on January the 15th, the SNB surprisingly decoupled from the euro peg, which caused the Swiss franc to rally up to 23 percent, an unprecedented move in the currency market (some people called it Francogeddon). It strengthened the U.S. dollar, but also increased safe-haven demand for gold, boosting its price, as one can see in the chart below.

Chart 2: The price of gold (yellow line, left axis, London P.M. Fix, in $) and the CHF/USD exchange rate (red line, right axis) from January 2014 to May 2018.

The key takeaway is that although Switzerland is geographically small, it matters significantly for the global economy. The Switzerland’s impact on the gold prices discovery is limited, but the country is the global gold hub with the major refineries located on its soil.