Gold hit a five-year low on July 20th. As for all commodities, its price movements are a reflection of supply and demand and expectations about the future.

Gold basically serves two purposes:

1. It is a commodity used in industry (e.g. electronics, jewelry, dentistry)
2. It is a store of value, especially as a protection in turbulent times, for example political upheavals.

But compared to other assets, gold is very different. It generates no income, and it costs even money to store it.

Gold rallied strongly after the financial crisis. Its price peaked in 2011 and ignoring some small rebounds has been falling since (see chart). Ii is approaching $1,000 an ounce and could even drop below that mark if we believe some commentators.

The most obvious reason for gold’s drop is the strong dollar. Gold is priced in dollars, which means that if the American currency goes up, the yellow metal is repriced accordingly. In addition the dollar’s rise is linked to the improving American economy, which will result sooner or later in higher interest rates. Higher interest rates increase the opportunity cost of holding a zero-yield asset; money invested in gold could be earning a return if invested in treasury bills. Strong earnings from stocks have a similar effect, as dividends increase it raises also the opportunity cost for gold.

Supporters of a higher gold price also hinted at China. The ambition to turn the yuan into a reserve currency would help to increase China’s gold stocks in order to make its currency credible in international eyes. China has raised its gold reserves a bit, but they are still very small and as a share of total reserves, China’s gold holdings are falling.

Gold also suffered because of political news. The euro zone’s deal on Greece has reduced the chance of a messy default, and of the break-up of the single currency. The nuclear deal with Iran reduces the risk of war and raises the chances of a broader agreement on other Middle East issues such as Syria.

So the main reason for holding gold is the scale by which central banks are creating money (“quantitative easing”) which will eventually result in disaster in international finance. But at the moment the public confidence in “fiat” money (currency backed by a promise, not precious metal as in former times) is not shattered.

The European Central Bank (ECB) lowered its key refinancing rate to 0.15%. And in an unprecedented move for a big central bank, it has cut its deposit rate, which it pays banks for parking funds with it overnight, into negative territory, at -0.1%. Therefore the banks will have to pay more if they park their future surplus with the central bank.

The ECB shows us yet again, its readiness to use unconventional methods.

Using negative interest rates is very rarely seen. The Swiss central bank had temporarily raised negative interest rates on foreign deposits to fend off speculative capital inflows. Denmark also applied this method, to prevent an appreciation of the Danish crown.

Basically, negative interest rates are problematic because interest is a future bonus in correlation with the present. If this bonus is negative, it consequently means that the future is not attached to any great value.

So why did the ECB impose negative interest rates?
In order to fight deflation and raise inflation.

Due to the low interest rates, the banks will be encouraged to increase lending in the economy. The euro should depreciate which lowers the cost of exports from EU countries towards the USA and Asia and as a result revive the European money market.

Compared to the “Quantitative Easing Program”, which is the large-scale purchase of government bonds, the interest rate cut has the advantage that it can be undone at any time.

We see no significant impact on the capital markets. It is increasingly difficult for investors to achieve reasonable returns. From our perspective, there’s no getting around the stock market and therefore, our asset management is currently overweight in shares.

Written by: Johannes Magar

Given the current situation, it seems clear that the Swiss financial place will eventually become smaller. Nevertheless, for assets transferred from generation to generation, stable countries are still a first choice. If you would be in Asia and if you would have saved money to hand over to the next generation of your family, where would you go with your assets? There is a chance that you may go to Singapore.
Or you would go to Switzerland, like many families from Western Europe do, because Switzerland has been strong and stable country for centuries.

Perhaps the Confederation is going through the worst period in decades. Swiss bankers record outflows, and it seems likely that this will continue for some time. However, one can also observe a huge influx, mainly from Asia and other emerging economies. These funds do not enter Switzerland directly, but through places like Hong Kong or Singapore, financial centres where Switzerland is well represented. The most important Swiss banks continue to pursue their strong “on-shore” strategy initiated since 2000.

Switzerland remains attractive, which is positive. Internally, banks are under fire, and at least half of the population believes that bankers are not only crazy, but moreover overpaid. However, this phenomenon is perceived differently in Asia where Swiss banks are still considered the best in the world and where confidence is sky-high. This confidence can be attributed in large part to the confidence towards the country itself and its political system where all political parties are represented in government.

The political system of Switzerland is well perceived and admired abroad …and as long as this lasts, the prospects are good!

Written by: Stefan Zeiss