The Swiss National Bank Gold Policy has sparked debate since its significant gold sales in the early 2000s. Back then, many questioned whether selling a substantial portion of central bank gold reserves was the right move. While the policy seemed sensible at the time, the global financial landscape has shifted dramatically since then. These changes are prompting central banks to reassess gold as an investment. Given the evolving conditions, should the Swiss National Bank (SNB) reconsider its approach to gold?

The Origins of the Swiss National Bank Gold Policy

In the late 1990s, many central banks, including the SNB, began to view gold as a relic of the past. The global economy appeared stable, and financial systems seemed robust. This led to the adoption of the Swiss National Bank Gold Policy, which resulted in the sale of over half the SNB’s central bank gold reserves between 2000 and 2005.

At the time, the gold sales program aimed to prevent market disruptions and stabilize gold prices. The SNB, alongside 15 other European central banks, coordinated sales as part of the Central Bank Gold Agreement. Gold prices had dropped to a two-decade low due to the UK’s decision to sell a portion of its gold reserves. Central bankers believed other assets, such as stocks and bonds, which generate income, were better investments than gold.

However, the assumptions driving these decisions no longer hold. Today’s economic landscape is very different, and the SNB’s decision to sell gold might deserve a fresh look.

Gold as an Investment in Today’s Market

Gold has always been regarded as a safe haven during economic or political crises. Unlike other financial assets, gold has no counterparty risk and holds value when currencies depreciate. In recent years, several central banks—especially in emerging markets—have started increasing their gold holdings. This shift indicates a reevaluation of gold’s importance in reserves.

For the SNB, this trend raises essential questions about its past gold sales program. The SNB sold 1,300 tons of gold between 2000 and 2005, followed by another 250 tons in the late 2000s. Since then, gold prices have soared, with a kilogram now costing more than 70,000 Swiss francs. Central banks that held onto their gold reserves have benefited from these rising prices.

Gold’s performance over the long term has also been impressive. In its 2023 annual report, the SNB noted that gold generated an average return of 4.3% in Swiss francs between 2009 and 2023. In contrast, the SNB’s foreign currency investments—bonds and equities—earned only 0.4% over the same period. The belief that gold was an outdated asset has lost much of its appeal. It may now be time for the SNB to reconsider its stance on gold within the broader context of its monetary policy decisions.

The Effects of the SNB’s Gold Sales Program on Its Balance Sheet

The SNB’s gold sales program dramatically altered its balance sheet. The bank initially held 2,590 tons of gold, but sales reduced this to just over 1,000 tons. At the time, the SNB justified these sales as part of a revaluation and diversification strategy. However, with gold prices now significantly higher than they were in the early 2000s, many argue that the SNB may have acted too hastily.

During the sales, the proceeds were distributed between the federal government and the cantons. A portion of these proceeds was also reinvested into foreign currency assets. Later, between 2007 and 2009, the SNB sold an additional 250 tons of gold. The SNB explained this as part of a rebalancing of its reserves, with the funds reinvested into foreign assets rather than distributed.

However, the decision to sell such large portions of gold now seems shortsighted, especially given the performance of other assets in recent years. Unlike bonds or foreign currency reserves, gold carries no counterparty risk. In this context, the SNB’s heavy involvement in purchasing foreign assets, especially government bonds from countries with unsustainable debt, has drawn criticism. The SNB’s monetary policy decisions may benefit from a fresh look at gold’s role in its portfolio.

Why the SNB Should Reconsider Gold Purchases?

Given the current economic landscape, should the SNB start buying gold again? There are compelling arguments in favor of increasing the SNB’s gold holdings. Gold is unique among reserve assets because it carries no counterparty risk. Unlike foreign currency reserves or government bonds, gold cannot be devalued or defaulted upon. It is also an excellent hedge against political or economic crises, which have become more frequent in recent years.

Emerging markets like China and Russia have increased their gold reserves to protect themselves from the risks of holding large amounts of foreign currency. Could the SNB benefit from a similar approach? Some economists believe it would be wise for the SNB to hold more gold, especially given the growing risks in the global financial system.

One concern is the high price of gold today. However, proponents of gold argue that its cost is a reflection of its value as insurance. The high price signals that markets do not consider future crises unlikely. From this perspective, the SNB could view the cost of buying gold as a necessary premium for financial insurance.

Gold’s Role in the SNB’s Monetary Policy Decisions

Reassessing the Swiss National Bank Gold Policy would require a review of how gold fits into its broader monetary policy decisions. Traditionally, central banks have relied heavily on foreign currencies and bonds for their reserves. However, as risks associated with these assets increase, the role of gold deserves more attention.

The SNB’s decision to buy foreign government bonds, particularly from countries with unsustainable debt levels, has faced growing criticism. By contrast, gold offers a stable and politically neutral alternative. Economist Adriel Jost has noted that the SNB appears more comfortable buying foreign bonds rather than increasing its gold reserves, likely due to concerns about signaling a lack of confidence in global markets.

Yet gold offers significant advantages that other assets do not. It cannot be devalued, defaulted on, or subject to political pressure. For the SNB, gold could provide greater financial independence and security against global financial instability.

Conclusion: Time for the SNB to Reconsider Its Gold Policy?

The Swiss National Bank Gold Policy was shaped by the financial realities of the early 2000s. However, those realities have changed, and gold is once again a valuable asset in times of crisis. Central bank gold reserves have proven crucial in providing stability during uncertain times. The SNB may need to reassess its stance on gold as it navigates complex monetary policy decisions.

With gold prices reflecting high levels of uncertainty in global markets, the SNB could benefit from increasing its gold holdings. The gold sales program, which made sense two decades ago, may no longer align with today’s financial environment. By diversifying its reserves to include more gold, the SNB could strengthen its monetary policy and better prepare for future crises. Gold as an investment, once undervalued, might now offer the security that central banks need for long-term stability.

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