Analys
No gold safety net?
On 30th November Switzerland will hold a “Save our Swiss gold” referendum. Should the petition turn out to be successful the Swiss National Bank would have to buy large quantities of gold and would be limited in its monetary policy. The market (and we as well) considers it unlikely that the petition will be successful. As a result the market reaction would be considerable if the referendum passes.
What is it all about?
The initiators of the petition “Save our Swiss gold” are of the view that only “gold can be the foundation of a stable franc”. So as to cement these foundations they demand a change of the constitution in the following points:
- The Swiss National Bank is going to be banned from selling gold in the future.
- The gold reserves have to be held in Switzerland.
- In the future the SNB will have to hold a minimum of 20% of its assets in gold.
Within two years of the referendum being passed the Swiss National Bank (SNB) has to return its gold reserves to Switzerland and has five years to reach the minimum requirement of 20%. The organisers of the petition argue that this is the only way of ensuring the independence of the central bank and the long term stability of the Swiss franc. The reason they state is the strong rise of the SNB’s balance sheet. Since the beginning of the financial market crisis six years ago the balance sheet has risen more than fourfold to CHF 522 bn. (chart 1). An important factor in this context is the introduction of the franc’s minimum exchange rate against the euro on 6th September 2011. The latter ensures that the exchange rate cannot ease below 1.20 francs per euro. In order to defend the minimum exchange rate the SNB had been forced to buy considerable amounts of euros over the past years. Since the introduction of the minimum exchange rate the balance sheet has risen by 40%, with the majority of this rise taking place between September 2011 and September 2012. With the easing of the Euro crisis the appreciation pressure on the franc was reduced and therefore SNB’s interventions subsided notably. However, should the ECB begin buying government bonds on a large scale next year the appreciation pressure on the franc is likely to rise again. This would also increase the likelihood of renewed SNB interventions, which in turn would lead to a further expansion of the SNB balance sheet.
The petition demands damage the credibility of the SNB
The petition demand to hold all SNB gold reserves in Switzerland does not limit the SNB. The main advantage of geographically distributing the gold reserves, the possibility to sell the reserves quickly, would become redundant as a result of the ban on selling gold. And as the reserve can no longer be sold in the event of a crisis it no longer constitutes a reserve in the stricter sense and therefore it does not matter whether it is distributed around the globe or sunk in one of the Swiss lakes. If the gold reserves cannot be sold they are “lost” for the Swiss economy and for supporting the franc. However, what does the combination of the sales ban and the 20% minimum gold share in the reserves mean for the SNB’s monetary policy? These two demands limit the central bank’s monetary policy scope considerably and make it more difficult for the SNB to fulfil its mandate: price stability in the sense of a rise of consumer prices of less than 2% per annum.
- A balance sheet expansion to fight deflation would entail gold purchases at possibly higher prices so as to ensure that the minimum requirement of 20% is met. Gold is considered to constitute the ultimate safe haven and therefore gets more expensive if the desire for more security increases. As a result the threshold for an extension of the balance sheet that requires gold purchases might be increased.
- Under certain conditions the SNB’s ability to control inflation with the help of a balance sheet contraction might be limited, as the SNB would no longer be able to contract its balance sheet at will. It would only be possible to reduce assets by reducing non-gold holdings as it would not be allowed to sell gold. As a result the gold holdings determine the minimum size of the balance sheet. A balance sheet contraction over and above that is not possible.
The market would be aware of the SNB’s dilemma, so it would constitute the perfect invitation for the market to bet against the SNB. It would open the door to speculators. The difficulties can easily be illustrated by explaining the significance of the petition demands for the EUR-CHF minimum exchange rate of 1.20.
Under the gold initiative the minimum exchange rate in its current form would have been impossible
The SNB introduced the minimum exchange rate to prevent the additional deflationary pressures caused by the appreciation of the franc. The most important reason behind its success is the SNB’s credibility that it would sell unlimited amounts of francs should that be necessary. The SNB would lose this credibility under the conditions of the gold initiative. In this context two factors are important for speculators:
- (1) If there is a risk that EUR-CHF could ease below 1.20 the SNB is forced to extend its balance sheet with the help of franc sales so as to weaken the franc. The difficulties this would cause were discussed above. After the implementation of the 20% requirement the necessary gold purchases could cause the SNB to hesitate and cause the market to question the SNB’s determination.
- (2) A successive contraction of the balance sheet might be possible to a limited extend only, theoretically until the gold share reached 100%. If the extension of the balance sheet cannot be fully reversed inflation pressure increases after a while. Medium term the target of maintaining monetary stability might come under threat. In line with its mandate of price stability the SNB has to anticipate the long term effects of an expansion of the balance sheet. This might cause the SNB to hesitate before selling francs. As a result the SNB’s promise to do everything to defend the minimum exchange rate would become less credible.
However, short term a positive outcome of the referendum would have little effect on the EURCHF exchange rate. Following the vote the SNB would have five years to meet the minimum requirement of 20% gold holdings. So for the time being it would be able to sell unlimited amounts of francs to defend the 1.20 exchange rate – and it would no doubt do so. It would do so to send out the clear signal that it can and will act.
However, that will not be the case medium to long term. At present the SNB expects a rate of inflation of 0.3% yoy in 2015 – which would not yet allow an exit from the minimum exchange rate strategy. As the requirements of the gold initiative act as an invitation to the market to attack the minimum exchange rate, the SNB would probably be unable to defend the minimum exchange rate long term. Over the coming years the SNB would therefore find it increasingly difficult to maintain the minimum exchange rate in its current form.
As long as the SNB sticks to the minimum exchange rate it is clear though that it would not be able to achieve the requirement to hold 20% gold by contracting the balance sheet. So if the gold initiative was to be successful the SNB would therefore be required to buy substantial amounts of gold, in order to reach the required share of 20% of gold in its assets. This would clearly influence the gold price.
Gold initiative might constitute the turning point for the gold price
As a result of the SNB’s balance sheet expansion the share of the gold reserves in the total balance has fallen continuously over the past few years. Until mid-2008, i.e. before the start of the financial market crisis, it still accounted for more than 20% – the level that the gold initiative would like it to return to. At present the gold holdings account for less than 8% of the balance, sheet without the amount of gold being held having changed during this time (chart 2 and chart 3 below). Since 2008 the reserves have always amounted to 33.44 m ounces (1,040 tons). At current gold price levels this corresponds to CHF 39bn For the gold share to reach 20% again, as demanded by the gold initiative, it would have to rise to CHF 104.5 bn. as long as the total balance remains unchanged. Assuming an unchanged gold price the SNB would have to buy 56.3 m ounces (which corresponds to approx. 1,750 tons) of gold. That would exceed the holdings of all gold ETFs tracked by Bloomberg (chart 4) and would correspond to approx. 60% of the annual global mine production.
Due to the many parameters it is difficult to give the exact purchasing volume required. The SNB balance sheet is likely to increase further next year if the ECB starts its broad-based bond purchases. Under these circumstances the SNB would probably be forced to once again purchase euros so as to defend the minimum exchange rate. So if everything else remains unchanged even larger gold purchases would then be necessary. On the other hand it seems likely that should the referendum end in a win for the gold initiative the gold price would rise. A rise in the gold price on the other hand would lead to a value based increase of the gold reserves’ share of the balance sheet. So that would mean the SNB has to buy less gold. A fall in the gold price would increase the required gold purchases but this is unlikely in view of the market expectations of imminent massive SNB gold purchases.
At present the market considers it relatively unlikely that the initiative will be successful. Current polls put the opponents of the initiative into a clear lead now after first polls had still assumed a majority for the supporters of the initiative. The chances of the initiative’s success have been dampened quite considerably since the executive committee of the Swiss People’s Party (SVP) voted against the initiative with a tight majority. That means the initiative’s only supporter amongst the parties has been lost, as the other parties are opposing the initiative. The SNB itself is also opposing the initiative for the reasons explained above. As hardly anybody expects the initiative to be accepted the effects of a surprise acceptance on the gold price would be even more pronounced. An outcome of that nature would be in a position to form the turning point in the development of the gold price and constitute the end of the 3-year bear market.
How pronounced would the price reaction in case of a vote in favour of the gold initiative be? The reaction of the gold price following the announcement of gold purchases by the Chinese and Indian central banks in 2009 might provide an indication. When the Chinese central bank announced in late April 2009 that it had increased its gold holdings by 454 tons in the previous 6 years the gold price rose by 6% within one month (chart 5). When the Indian central bank purchased 200 tons of IMF gold, a transaction that became public in early November 2009, this caused a price rise of 15% within one month. The even larger amount of gold the SNB would have to buy suggests that the price would rise at least by a similar magnitude. On the other hand the clearly more negative market sentiment compared with 2009 points in the other direction. At the time the gold price had been in a 7-year uptrend whereas it has been in a downtrend for three years now (chart 4).
Throughout this week, the Brent Crude price has experienced a decline of USD 3 per barrel, despite ongoing turmoil in the Middle East. Price fluctuations have ranged from highs of USD 91 per barrel at the beginning of the week to lows of USD 87 per barrel as of yesterday evening.
Following the release of yesterday’s US inventory report, Brent Crude once again demonstrated resilience against broader macroeconomic concerns, instead focusing on underlying market fundamentals.
Nevertheless, the recent drop in prices may come as somewhat surprising given the array of conflicting signals observed. Despite an increase in US inventories—a typically bearish indicator—we’ve also witnessed escalating tensions in the Middle East, coupled with the reinstatement of US sanctions on Venezuela. Furthermore, there are indications of impending sanctions on Iran in response to the recent attack on Israel.
Treasury Secretary Janet Yellen has indicated that new sanctions targeting Iran, particularly aimed at restricting its oil exports, could be announced as early as this week. As previously highlighted, we maintain the view that Iran’s oil exports remain vulnerable even without further escalation of the conflict. It appears that Israel is exerting pressure on its ally, the US, to impose stricter sanctions on Iran, an action that is unfolding before our eyes.
Iran’s current oil production stands at close to 3.2 million barrels per day. Considering additional condensate production of about 0.8 million barrels per day and subtracting domestic demand of roughly 1.8 million barrels per day, the net export of Iranian crude and condensate is approximately 2.2 million barrels per day.
However, the uncertainty surrounding the enforcement of such sanctions casts doubt on the likelihood of a complete ending of Iranian exports. Approximately 80% of Iran’s exports are directed to independent refineries in China, suggesting that US sanctions may have limited efficacy unless China complies. The prospect of China resisting US pressure on its oil imports from Iran poses a significant challenge to US sanctions enforcement efforts.
Furthermore, any shortfall resulting from sanctions could potentially be offset by other OPEC nations with spare capacity. Saudi Arabia and the UAE, for instance, can collectively produce an additional almost 3 million barrels of oil per day, although this remains a contingency measure.
In addition to developments related to Iran, the Biden administration has re-imposed restrictions on Venezuelan oil, marking the end of a six-month reprieve. This move is expected to impact flows from the South American nation.
Meanwhile, US crude inventories (excluding SPR holdings) surged by 2.7 million barrels last week (page 11 attached), reaching their highest level since June of last year. This increase coincided with a decline in measures of fuel demand (page 14 attached), underscoring a slightly weaker US market.
In summary, while geopolitical tensions persist and new rounds of sanctions are imposed, our market outlook remains intact. We maintain our forecast of an average Brent Crude price of USD 85 per barrel for the year 2024. In the short term, however, prices are expected to hover around the USD 90 per barrel mark as they navigate through geopolitical uncertainties and fundamental factors.
In the past two trading days, Brent Crude prices have fluctuated between highs of USD 92.2 per barrel and lows of USD 88.7 per barrel. Despite escalation tensions in the Middle East, oil prices have remained relatively stable over the past 24 hours. The recent barrage of rockets and drones in the region hasn’t significantly affected market sentiment regarding potential disruptions to oil supply. The key concern now is how Israel will respond: will it choose a strong retaliation to assert deterrence, risking wider regional instability, or will it revert to targeted strikes on Iran’s proxies in Lebanon, Syria, Yemen, and Iraq? While it’s too early to predict, one thing is clear: brace for increased volatility, uncertainty, and speculation.
Amidst these developments, the market continues to focus on current fundamentals rather than unfolding geopolitical risks. Despite Iran’s recent attack on Israel, oil prices have slid, reflecting a sideways or slightly bearish sentiment. This morning, oil prices stand at USD 90 per barrel, down 2.5% from Friday’s highs.
The attack
Iran’s launch of over 300 rockets and drones toward Israel marks the first direct assault from Iranian territory since 1991. However, the attack, announced well in advance, resulted in minimal damage as Israeli and allied forces intercepted nearly all projectiles. Hence, the damage inflicted was limited. The incident has prompted US President Joe Biden to urge Israel to exercise restraint, as part of broader efforts to de-escalate tensions in the Middle East.
Israel’s response remains uncertain as its war cabinet deliberates on potential courses of action. While the necessity of a response is acknowledged, the timing and magnitude remain undecided.
The attack was allegedly in retaliation for an Israeli airstrike on Iran’s consulate in Damascus, resulting in significant casualties, including a senior leader in the Islamic Revolutionary Guard Corps’ elite Quds Force. It’s notable that this marks the first direct targeting of Israel from Iranian territory, setting the stage for heightened tensions between the two nations.
Despite the scale of the attack, the vast majority of Iranian projectiles were intercepted before reaching Israeli territory. However, a small number did land, causing minor damage to a military base in the southern region.
President Biden swiftly condemned Iran’s actions and pledged to coordinate a diplomatic response with leaders from the G7 nations. The US military’s rapid repositioning of assets in the region underscores the seriousness of the situation.
Iran’s willingness to escalate tensions further depends on Israel’s response, as indicated by General Mohammad Bagheri, chief of staff of the Iranian armed forces. Meanwhile, speculation about a retaliatory attack from Israel persists.
Looking ahead, key questions remain unanswered. Will Iran launch additional attacks? How will Israel respond, and what implications will it have for the region? Moreover, how will Iran’s allies react to the escalating tensions?
Given the potential for a full-scale war between Iran and Israel, concerns about its impact on global energy markets are growing. Both the United States and China have strong incentives to reduce tensions in the region, given the destabilizing effects of a regional conflict.
Our view in conclusion
The recent escalation between Iran and Israel underscores the delicate balance of power in the volatile Middle East. With tensions reaching unprecedented levels and the specter of further escalation looming, the potential for a full-blown conflict cannot be understated. The ramifications of such a scenario would be far-reaching and could have significant implications for regional stability and global security.
Turning to the oil market, there has been much speculation about the possibility of a full-scale blockade of the Strait of Hormuz in the event of further escalation. However, at present, such a scenario remains highly speculative. Nonetheless, it is crucial to note that Iran’s oil production and exports remain at risk even without further escalation. Currently producing close to 3.2 million barrels per day, Iran has significantly increased its production from mid-2020 levels of 1.9 million barrels per day.
In response to the recent attack, Israel may exert pressure on its ally, the US, to impose stricter sanctions on Iran. The enforcement of such sanctions, particularly on Iranian oil exports, could result in a loss of anywhere between 0.5 million to 1 million barrels per day of oil supply. This would likely keep the oil market in deficit for the remainder of the year, contradicting the Biden administration’s wish to maintain oil and gasoline prices at sustainable levels ahead of the election. While other OPEC nations have spare capacity, utilizing it would tighten the global oil market even further. Saudi Arabia and the UAE, for example, could collectively produce an additional almost 3 million barrels of oil per day if necessary.
Furthermore, both Iran and the US have expressed a desire to prevent further escalation. However, much depends on Israel’s response to the recent barrage of rockets. While Israel has historically refrained from responding violently to attacks (1991), the situation remains fluid. If Israel chooses not to respond forcefully, the US may be compelled to promise stronger enforcement of sanctions on Iranian oil exports. Consequently, Iranian oil exports are at risk, regardless of whether a wider confrontation ensues in the Middle East.
Analyzing the potential impact, approximately 2.2 million barrels per day of net Iranian crude and condensate exports could be at risk, factoring in Iranian domestic demand and condensate production. The effectiveness of US sanctions enforcement, however, remains uncertain, especially considering China’s stance on Iranian oil imports.
Despite these uncertainties, the market outlook remains cautiously optimistic for now, with Brent Crude expected to hover around the USD 90 per barrel mark in the near term. Navigating through geopolitical tensions and fundamental factors, the oil market continues to adapt to evolving conflicts in the Middle East and beyond.
Lots of talk about an increasingly tight oil market. And yes, the oil price will move higher as a result of this and most likely move towards USD 100/b. Tensions and flareups in the Middle East is little threat to oil supply and will be more like catalysts driving the oil price higher on the back of a fundamentally bullish market. I.e. flareups will be more like releasing factors. But OPEC+ will for sure produce more if needed as it has no interest in killing the goose (global economy) that lays the golden egg (oil demand growth). We’ll probably get verbal intervention by OPEC+ with ”.. more supply in H2” quite quickly when oil price moves closer to USD 100/b and that will likely subdue the bullishness. OPEC+ in full control of the oil market probably means an oil price ranging from USD 70/b to USD 100/b with an average of around USD 85/b. Just like last year.
Brent crude continues to trade around USD 90/b awaiting catalysts like further inventory declines or Mid East flareups. Brent crude ydy traded in a range of USD 88.78 – 91.1/b before settling at USD 90.38/b. Trading activity ydy seems like it was much about getting comfortable with 90-level. Is it too high? Is there still more upside etc. But in the end it settled above the 90-line. This morning it has traded consistently above the line without making any kind of great leap higher.
Netanyahu made it clear that Rafah will be attacked. Israel ydy pulled some troops out of Khan Younis in Gaza and that calmed nerves in the region a tiny bit. But it seems to be all about tactical preparations rather than an indication of a defuse of the situation. Ydy evening Benjamin Netanyahu in Israel made it clear that a date for an assault on Rafah indeed has been set despite Biden’s efforts to prevent him doing so. Article in FT on this today. So tension in Israel/Gaza looks set to rise in not too long. The market is also still awaiting Iran’s response to the bombing of its consulate in Damascus one week ago. There is of course no oil production in Israel/Gaza and not much in Syria, Lebanon or Yemen either. The effects on the oil market from tensions and flareups in these countries are first and foremost that they work as catalysts for the oil price to move higher in an oil market which is fundamentally bullish. Deficit and falling oil inventories is the fundamental reason for why the oil price is moving higher and for why it is at USD 90/b today. There is also the long connecting string of:
[Iran-Iraq-Syria/Yemen/Lebanon/Gaza – Israel – US]
which creates a remote risk that oil supply in the Middle East potentially could be at risk in the end when turmoil is flaring in the middle of this connecting string. This always creates discomfort in the oil market. But we see little risk premium for a scenario where oil supply is really hurt in the end as neither Iran nor the US wants to end up in such a situation.
Tight market but OPEC+ will for sure produce more if needed to prevent global economy getting hurt. There is increasing talk about the oil market getting very tight in H2-24 and that the oil price could shoot higher unless OPEC+ is producing more. But of course OPEC+ will indeed produce more. The health of the global economy is essential for OPEC+. Healthy oil demand growth is like the goose that lays the golden egg for them. In no way do they want to kill it with too high oil prices. Brent crude averaged USD 82.2/b last year with a high of USD 98/b. So far this year it has averaged USD 82.6/b. SEB’s forecast is USD 85/b for the average year with a high of USD 100/b. We think that a repetition of last year with respect to oil prices is great for OPEC+ and fully acceptable for the global economy and thus will not hinder a solid oil demand growth which OPEC+ needs. Nothing would make OPEC+ more happy than to produce at a normal level and still being able to get USD 85/b. Brent crude will head yet higher because OPEC+ continues to hold back supply Q2-24 resulting in declining inventories and thus higher prices. But when the oil price is nearing USD 100/b we expect verbal intervention from the group with statements like ”… more supply in H2-24” and that will probably dampen bullish prices.
Not only does OPEC+ want to produce at a normal level. It also needs to produce at a normal level. Because at some point in time in the future there will be a situation sooner or later where they will have to cut again. And unless they are back to normal production at that time they won’t be in a position to cut again.
So OPEC+ won’t kill the goose that lays the golden egg. They won’t allow the oil price to stay too high for too long. I.e. USD 100/b or higher. They will produce more in H2-24 if needed to prevent too high oil prices and they have the reserve capacity to do it.
Data today: US monthly oil market report (STEO) with forecast for US crude and liquids production at 18:00 CET
Fundamentals trump geopolitical tensions
Fortum och Vargön Alloys tecknar femårigt avtal om kärnkraftsel
Kärnkraftreaktorutvecklaren Blykalla har gjort en kapitalanskaffning på 80 Mkr
Mexikos sockerproduktion den lägsta på ett decennium
Kaffepriserna rör på sig
Michel Rufli om trenderna som får guldpriset att stiga
Guld toppar 2200 USD per uns
Guldpriset når nytt all time high och bryter igenom 2300 USD
Lundin Mining får köprekommendation av BMO
Vertikal prisuppgång på kakao – priset toppar nu 9000 USD
-
Nyheter4 veckor sedanMichel Rufli om trenderna som får guldpriset att stiga
-
Nyheter4 veckor sedanGuld toppar 2200 USD per uns
-
Nyheter2 veckor sedan
Guldpriset når nytt all time high och bryter igenom 2300 USD
-
Nyheter3 veckor sedanLundin Mining får köprekommendation av BMO
-
Nyheter3 veckor sedanVertikal prisuppgång på kakao – priset toppar nu 9000 USD
-
Nyheter2 veckor sedanCentralbanker fortsatte att köpa guld under februari
-
Nyheter4 veckor sedanKaffepriserna stiger på lågt utbud och stark efterfrågan
-
Nyheter2 veckor sedanHur mår den svenska skogsbraschen? Två favoritaktier