This commentary is from the archive, as your commentator is on holiday. It was first published in November 2014
The release of the Federal Open Market Committee’s (FOMC) minutes for the most recent meeting, at which Quantitative Easing was officially discontinued, were released late yesterday in GMT terms.
While there was some instantaneous volatility of currency pairs containing the US dollar on the release, rather in the manner of Pavlov’s dogs, things quickly returned to where they were prior to it.
The revealed discussions indicate what has now become a fairly predictable pattern. Like all Central Bankers around the world, the members are concerned about falling inflation. However, while this is a general problem in developed economies, the FOMC does not seem to be overly concerned that economic conditions overseas will unduly affect the USA.
The minutes are always scrutinised by market participants for certain key phrases, and the one to watch at the moment is “considerable period”, which refers to the amount of time that will have to pass after the ending of QE before interest rates Stateside start to rise. The most significant takeaway for the market in this release is that this formula is still in place. This is interpreted to mean that core rates will not rise until at least the middle of next year, and even at that the committee has reiterated that the timing is still dependent on data that emerges between now and then.
The Swiss nostalgia for gold
There was a time when currencies had to be backed by the gold holdings of the government that issued them. This was called the gold standard, and it was ended for good in the early 1970’s, when the value of a currency was made to depend rather on the credibility and the economic management of the economy in question. So the US dollar, the Euro, the pound Sterling and so on are all now known as “fiat currencies”, because their value is now decided by the action, or fiat, of the issuing jurisdiction.
After the ending of the gold standard, most developed economies sold their gold holdings and bought the bonds or held the currencies of other countries instead, which now constitute their economic reserves. What none of them realised at the time of these gold sales was the dramatic rise that was about to take place in its price, especially after the onset of the Global Financial Crisis which began in earnest in 2007. The rise in gold then was due to fears of rampant inflation, for which the yellow metal would be a hedge, after the introduction of QE in the USA.
The fact that a rise in inflation did not materialise is of no interest to certain Swiss citizens, who criticise their government for not keeping their gold and therefore enhancing the country’s wealth by its appreciation. These people have enough support to bring about a referendum which is aimed at forcing the Swiss National Bank (SNB) to maintain at least 20% of its reserves in gold, up from the 10% they hold at present. The voting takes place in ten days’ time, on Nov. 30th.
The Chairman of the SNB, Thomas Jordan, has come out against the proposal, as have many business people. They argue that the requirement, if passed, would hamper efforts to manage the Swiss franc valuation, which is a major concern as it has become too strong for the good of exports. They are effectively saying, in regard to the gold standard, “that was then, this is now”.
Opinion polls are indicating that the referendum is more likely to fail than to succeed but the prospect of the Swiss government having to make significant purchases of the yellow metal, in the event that the measure is carried, has gold investors more than a little bit excited.