Submitted by Mark O’Byrne – GoldCore
Although the extent to which the surprise move by the Swiss National Bank last week has damaged financial institutions will not be apparent until the end of the month, it is already clear that enormous damage has been wreaked on many businesses exposed to the foreign exchange markets.
GoldCore has seen significant increase in gold demand from investors in the first weeks of January 2015 as compared to the same period in 2014. Gold bullion volume amongst buyers was 3 (365%) times level last year, with particular emphasis being placed on safe secure storage vaults in Zurich and Hong Kong and Singapore.
On Thursday the SNB unpegged its currency from the euro without warning. The peg was put in place three years ago during the height of the euro crisis to prevent the Swiss franc from rising too much relative to its EU neighbours and damaging its exports.
The shock move caused the Swiss franc to rally almost 30% against the euro and 28% against the dollar. To maintain the peg, the SNB had been forced to accumulate around €500 billion leaving it very vulnerable to a euro devaluation.
It would seem that the move was not coordinated with the ECB or the Fed and may be endemic of a new low phase in global central bank communications. Many times throughout the financial crisis central banks have coordinated efforts to stabilise market volatility and to manage stimulus programs in concert.
The SNB shock announcement seems to have happened in isolation and could mark the start of a far less accommodative stance by national central banks. This is not surprising as with a strong dollar, the U.S. is able to reduce the costs to foreign markets of its goods and services, thereby producing a massive competitive advantage. Now that the euro is going to start debasing itself too, it is natural that the Swiss also abandon a peg which is about to become indefensible. The question “Who next?” will break ranks. Currency wars and related volatility are now in full swing.
According to Bloomberg, Citigroup, the largest currency dealer globally, lost around $150 million on the move. Deutsche bank also lost $150 million and Barclays are reported to have incurred losses of €100 million.
Some funds and FX brokers and their customers were severely hit with funds closing and other businesses going under or getting bailed out by larger institutions.
Everest Capital had to close it’s Global Fund.
“Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about $830 million in assets at the end of the year, after losing virtually all its money on the SNB’s decision, a person familiar with the firm said last week.”
Other companies have failed completely such as Alpari in the UK and Global Brokers NZ in New Zealand.
Banks in Croatia and Poland may yet feel the pinch as many of the mortgages taken out by house-buyers were in Swiss francs. This was done to avail of low interest rates but now many homeowners will find themselves in negative equity.
The Croatian government is considering pegging it’s kuna to the Swiss franc for one year to give borrowers time to adjust. Poland’s deputy prime minister, Janusz Piechocinski, has suggested that Poland will support borrowers caught in the maelstrom if the Swiss franc remains above the 4-zloty level for an extended period.
So far there have been no reports of national governments being exposed to the move as happened when Brazil and Mexico’s treasuries had shorted the dollar before its rally.
The unsignaled move by the SNB suggests an acceleration of the currency wars. Many analysts expect similar moves from other central banks who have been maintaining a peg with the euro or dollar. As central banks increasingly act unilaterally and defensively it may be that confidence in the central banks themselves will be eroded.
Dr. Marc Faber of the Gloom, Boom and Doom Report believes that such an environment will be conducive to owning gold. At a Societe Generale presentation in London last week he said,
“I’m positive gold will go up substantially [in 2015] — say 30%.” He continued, “My belief is that the big surprise this year is that investor confidence in central banks collapses. And when that happens — I can’t short central banks, although I’d really like to, and the only way to short them is to go long gold, silver and platinum,” he said. “That’s the only way. That’s something I will do.”
Dr. Faber is always very measured in his forecasts. Investors the US and around the world would be wise to take note of his suggestion by holding gold in fully allocated, fully segregated accounts in fully audited vaults in the safest jurisdictions in the world.
StealthFlation 
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