Reforming the Swiss Monetary Constitution Implications for Gold

In order to close the gap between monetary legislation and monetary reality, several referenda are planned over the next 12 months. The first referendum on the agenda was recently held on April 18th. It encompasses a complete update of the Swiss Constitution including - among many items - the monetary regime and gold. It formalises the absence in practice, of a link between the Swiss franc and gold. Upon approval at the referendum level, Constitutional amendments require subsequent amendments on the legislative level. For this reason, a draft law on Currency and Payment instruments was submitted to a consultation procedure in autumn 1998 t is intended to replace the current Coinage Law and several provisions of the National Bank Law. According to the draft law, not only will currency circulation no longer need to be backed by gold, but the SNB will no longer have to value its gold reserves at the official parity price. It will be allowed to buy and sell gold at market prices. Unlike constitutional changes, amendments to laws are not submitted to a referendu1.n unless a minimum of 50,000 Swiss voters’ petitions for one during a three-month waiting period. If this period elapses without sufficient petitions, then the law passes.

The draft law will probably remain under discussion until the autumn of 1999, with a final version produced by the end of the year. Since this is a technical issue, a referendum is fairly improbable. Therefore, the law on Currency and Payment Instruments can be expected to enter into force in spring 2000. Passage would allow the SNB to operate on the gold market at prevailing conditions.

The final measure involves a more comprehensive reform of the SNB's constitutional basis, which adds new elements to the article proposed in the first referendum on constitutional reform. The new article has already been discussed in the Federal Parliament and is expected to be put to the vote in the spring of next year. Among its provisions, it stipulates that monetary policy should give priority to ensuring price stability.

As for gold reserves, the proposed article deals with the profits which the revaluation of the gold stock at market prices will trigger (about SFR 20 billion). In, its message to the Parliament, the Federal Cow1cil (government) has come to the conclusion that 1,300 tonnes of gold - i.e. half of the gold stock - would no longer be necessary for monetary policy implementation and could be put to other uses, for which the Federal Parliament will have to set priorities and select projects. One proposal submitted by the government is to set up a Solidarity Foundation to help individuals in Switzerland and abroad suffering hardship through no fault of their own. The Foundation would be endowed with 500 tonnes of gold. The return it could earn on its gold stock would provide it, with the required financial means. A Foundation Act is expected to be dealt with in Parliament only after the comprehensive reform of the SNB's constih1tional basis in spring 2000.

If the Law on Currency and Payment Instruments is approved, the SNB will have increased latitude to manage the country's official reserves, including gold. The market interprets that increased latih1de to mean that the SNB will sell part of its gold holdings. Unlike most central banks which maintain strict secrecy, the SNB has a perfectly transparent strategy for its gold policy. How and when the SNB will be active in the market is a question of short-term tactics. In any case, future transactions will take into account the market's ability to accommodate them.

Unlike most central banks which maintain strict secrecy, the SNB has a perfectly transparent strategy for its gold policy.