Swissy Cheese – What Now, Gold?

If you’re not living in a cave, you’ve probably heard by now that the Swiss National Bank made a bold statement this morning:

“Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.”

The CHF (Swiss Franc) has been a safe haven of late:

XSF Index

 

That’s a problem for Switzerland – as the SNB notes: when your currency is TOO strong, your economy suffers.  In plain English (or, Swiss, as it may be), no one can afford to buy the stuff your country makes, and it’s bad for your economy.  Hence, the SNB intervention.

Now, since the CHF was a leading “safe haven” for those seeking refuge from the financial gonorrhea rapidly festering in the Eurozone, my initial reaction was that this FX intervention would be bullish for gold – a “competing” safe havene.  What do readers think?   Brian O’Flanagan weighed in with some intelligent comments which I think are worth including here:

“On the surface, it would seem to be highly bullish for gold. The possible negatives could be:

1) investors throw in the towel and just put assets in USD, on the assumption that there is less of a risk of a 9% overnight move in the USD going against you.

 

2) this pushes investors into risk assets

 

3) the extreme losses experienced by CHF long speculators raises a warning flag for gold – i.e. bulls make money but pigs get slaughtered so to speak.

 

4) this could be a prelude to some intervention in the gold market.

 

One thing is clear to me is that no asset is safe in this environment.”

 

-KD

 

disclosure: long $GDX vs short $GLD equal dollars

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