THE BLOG
01/16/2015 03:44 pm ET Updated Mar 18, 2015

Swiss National Bank: Well Played!

The Swiss are being Swiss, meaning the Swiss National Bank (SNB), unlike most other Central Bankers, haven't completely lost their minds. Yesterday, the Swiss National Bank lifted the cap on the franc versus the euro. In other words, SNB decided it was the right time to stop playing rope a dope.

The market reaction was brutal, punishing the Euro and every foreign exchange and options trader on the wrong side of this trade. Some forex trading firms will go under. Foreign exchange trading desks within banks are, of course, part of ongoing unwilling taxpayer largesse.

Misdirection and a Quick Reversal

Recall that on 30 November 2014, the Swiss National Bank issued this formal press release after the gold referendum was voted down:

Press release

Zurich/Berne, 30 November 2014

Swiss National Bank statement on the outcome of the vote held on 30 November 2014
Rejection of the gold initiative

The Swiss National Bank (SNB) is pleased to hear of the outcome of the gold initiative vote.

The SNB has a constitutional and legal mandate to conduct monetary policy in the interests of the country as a whole.

It is charged with ensuring price stability while taking due account of the development of the economy. An acceptance of the initiative would have severely constrained the SNB in fulfilling this mandate. With conditions unchanged, the SNB can now continue pursuing its monetary policy geared towards price stability. In the current situation, the minimum exchange rate against the euro remains the key instrument for this purpose. The SNB will continue to enforce the minimum exchange rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities to this end.

The SNB will take further measures immediately if required.

The last sentence holds the key. Now you know the Swiss National Bank's idea of "further measures."

Don't you just love the phrase, "prepared to buy foreign currency in unlimited quantities." Some central banks were prepared to sell in unlimited quantities, and SNB knew that when they penned this classic example of misdirection. The Euro is troubled; Greece is staying in the Euro for the moment. Europe's banks, unlike US banks, still need to be recapitalized. Russia is edging away from the PetroDollar.

The Swiss Will Protect Their Currency for the Gravest Extreme

SNB is not required to increase the percentage of reserve capital to 20 percent gold, because the referendum was defeated. But not being required to do something does not mean you are not free to make a choice to do something.

As of the end of December, the SNB held 48 percent of its foreign-currency reserves in euros and 27 percent in dollars. Of that, 16 percent were held in equities and the remainder in highly rated sovereign bonds. Around eight percent of the reserves were held in gold.

Look at all of the Swiss banks in aggregate. Be on the lookout for the Swiss either repatriating their gold or doing a gold swap that repatriates the gold in a way that isn't obvious. Watch gold accumulation and currency flows.

See also: "Hidden Bank Risks Drive Investors to Productive Assets and Gold"