It’s official! During the referendum held over the weekend, Swiss voters rejected the proposal requiring the SNB to hold 20% of its reserves in gold. The results affected the Swiss franc, gold prices, and even the Australian dollar.
1. Swiss franc selloff
As I’ve mentioned in an earlier article on the “Save Our Swiss Gold” movement, this initiative would limit the SNB’s power to ease monetary policy or intervene in the forex market to keep the franc weak. After all, the measure would require the central bank to repatriate gold from overseas or sell some of its foreign currency holdings in order to meet the 20% gold reserves ratio.
No wonder the “No” vote resulted in a franc selloff! Without any requirements to maintain a certain level of gold holdings in their balance sheet, the SNB can still afford to sell huge amounts of francs to defend their currency peg and reinforce the EUR/CHF floor at 1.2000.
2. Drop in gold prices
Prior to the referendum, market participants also entertained the possibility that the SNB would be a major buyer of gold if the initiative was passed. Bear in mind that the central bank’s current gold holdings stood at 8% and that they’d need to purchase at least 1,500 metric tons of gold bars over five years if the proposal got approved.
This possibility had been keeping gold prices supported over the past month, as the precious metal even traded around $1,200/ounce days before the referendum. Once the results were announced, prices tumbled below $1,150/ounce and is edging close to its five-year lows.
3. AUD weakness
Because of the Australian dollar’s positive correlation with gold prices, Aussie pairs also took a hit after the rejection of the Swiss gold initiative. AUD/USD gapped down over the weekend and could experience more selling pressure if gold prices continue to decline. As of this writing, the pair is establishing new four-year lows, as the U.S. dollar appears to be benefitting from its negative correlation with the precious metal.
Got any trade ideas based on the outcome of the Swiss gold referendum? Don’t be shy to share your thoughts in our comments section!