24K99 news editor Peter Kuster stated that 25 years ago, the Swiss National Bank sold more than half of its gold reserves, and many assumptions at that time were later proven to be incorrect. He believes that despite the record high gold trading price, it is time for the Swiss National Bank to start buying gold reserves again.

Kuster mentioned in an analysis article on Thursday (September 26th) that 25 years ago, 15 central banks signed the "Gold Agreement," which opened the door for the Swiss National Bank (SNB) to sell gold. "At that time, many people opposed gold as an investment," he said. "However, most of these assumptions were later proven to be wrong, prompting the need for reevaluation."

(Source: Kitco)

This year marks the 25th anniversary of the "Gold Agreement" signed by 15 European central banks, including the Swiss National Bank, at the Bretton Woods institution's annual meeting.

The agreement aims to coordinate the gold sales of various central banks and collectively decide not to sell more than 2,000 tons of gold over the next five years.

Kuster continued: "In the process of leading the sales plan, the Swiss National Bank sold 1,300 tons of gold between 2000 and 2005, exceeding half of its original 2,590 tons reserves."

The reason for such close coordination is that after news of multiple central banks planning to sell reserves spread, central banks around the world needed to stabilize the gold market. "In May 1999, the UK announced a gold sale plan, leading to gold prices falling to the lowest point in 20 years," he said. "The world seemed peaceful, united, stable, and gold was seen as a relic of the past. In addition, compared to stocks paying dividends or bonds paying coupons, gold was considered an unattractive investment because it does not generate income."

At the time, Switzerland was in a unique position. Kuster wrote: 'At the end of the 1990s, Switzerland's gold reserves ranked 5th globally, with per capita reserves ranking first in the world. The Swiss National Bank had to value gold on its balance sheet at a fair exchange rate of 4595 francs per kilogram, making the prospect of revaluation gains particularly attractive during the transition to market pricing.'

The statement released by the Swiss National Bank in March 1997 truly changed the landscape of the precious metals market.

'According to the advice of the then Swiss National Bank President Hans Meyer (without consulting the other two Managing Board members), using the appreciation proceeds of Swiss National Bank gold to fund the Solidarity Foundation, aiming to address the intense debate on dormant accounts and Switzerland's role during World War II,' said Kuster.

He pointed out: 'In June 1999, the Swiss National Bank announced its gold sales plan, signed the 'Gold Agreement' in the same year, and sold 1300 tons of 'excess' gold between May 2000 and March 2005, but it is not yet clear what these proceeds (totaling 21.1 billion francs, priced at 16241 francs per kilogram) will be used for.'

The Swiss National Bank ultimately allocated one-third of the funds from gold sales to the federal government and two-thirds to the cantons, which became the standard pattern in the future. Then, between 2007 and 2009, the Swiss National Bank sold another 250 tons of gold. 'In contrast to the first sale, the proceeds were not distributed, but reinvested in foreign exchange assets,' Kuster wrote. 'The Swiss National Bank argued that its gold holdings accounted for a significant portion of its foreign exchange reserves, justifying this transaction.'

Swiss voters subsequently rejected a proposal in November 2014 that required the Swiss National Bank to keep at least 20% of reserves in gold. 'The initiative likely failed due to its ill-considered 'ban on sales clause,' which would severely limit the Swiss National Bank's monetary policy flexibility,' he wrote.

Kuster stated that the decision of the Swiss National Bank to sell over 50% of its gold reserves 'looks more distant today than it actually is.' 'For years, central banks around the world, especially those in emerging markets, have been buying gold,' he pointed out. 'Gold prices have been hitting new highs, currently exceeding 70,000 francs per kilogram. And the concept of a peace cooperation world focused on economic pragmatism has now become a distant dream only the most optimistic can possess.'

He stated that the performance of gold has been repeatedly proven to be superior to many other financial assets. 'In its 2023 annual report, the Swiss National Bank pointed out that the average annual return on gold in Swiss francs from 2009 to 2023 was 4.3%, while the return on foreign currency investments (bonds and stocks) during the same period was only 0.4%,' he noted. 'Even solely on stocks, it is almost impossible to surpass gold, with the return since the Swiss National Bank first started investing in stocks in 2005 being 4.5%.'

Although it is easy to criticize these gold sales afterwards, Kuster said: "The more interesting question is whether the Swiss National Bank should reconsider today's gold purchase plan, especially given its balance sheet has expanded due to the massive purchase of foreign exchange to counter the strong Swiss franc, while its gold reserves remain at 1040 tons."

Independent economist Adriel Jost recently discussed this issue, pointing out that in the struggle against the strong Swiss franc, the Swiss National Bank seems more willing to purchase bonds from countries with unsustainable debt (possibly referring to the United States and certain European countries) rather than gold.

Kuster explained: "Jost has studied various arguments, including liquidity, but he believes the real reason why the Swiss National Bank is unwilling to buy gold is different. Buying gold would indicate a lack of confidence in other countries, and the Swiss National Bank does not want to unsettle foreign central banks." Jost concluded: "We hope the Board of Directors will soon have the courage to achieve this independence."

He stated that this independence of thought will also enhance the institutional independence of the Swiss National Bank.

"Foreign countries may pressure Switzerland to hold government bonds, otherwise its refinancing costs may rise," he said. "Internally, the investment policy of the Swiss National Bank has long been a target of political demands, especially in terms of sustainability. In September, the think tank Avenir Suisse called for the Swiss National Bank to invest widely and neutrally in stocks and corporate bonds, rather than exclude assets based on sustainability standards or political concerns."

Kuster pointed out that in his view, "Avenir Suisse overlooks the unique role of gold, namely that gold is an asset with no counterparty risk, has relatively weak lobbying power, and is not easily influenced by geopolitical pressures (except in the 1990s when terms like 'looted gold' were used due to dormant accounts)."

"The question of whether it is appropriate for the Swiss National Bank to buy gold again is certainly worth discussing," Kuster wrote. "However, gold can be seen as insurance against severe geopolitical and economic crises, as well as financial and monetary system turmoil. From this perspective, the price of gold represents the premium of this insurance. When the premium is high, it simply reflects that the market does not consider the risk of a serious crisis as negligible."

Kuster concluded: "These should be compelling reasons for the Swiss National Bank to reevaluate the gold issue after 25 years, but this time the intention is the opposite."