Attractive Swiss Franc Could Soon Get An Even More Attractive ‘Gold-backed’ Sister

Switzerland’s Swiss franc has long been considered a safe haven and it’s certainly living up to its reputation today. However if the nation decides to go through with plans to setup a second gold-backed franc it could be upstaged by its new little sister.

Since June last year the Swiss franc gained more than 50% against the US dollar and 33% against the British pound

Already A Safe Haven

Despite the fact that the current Swiss franc (CHF) severed its gold backing back in May 2000 it is still considered a safe haven. There are several reason for this: Unlike the US and Japan, Switzerland is not plagued by a high national debt and perpetual budget deficits and its monetary policy has been rather more conservative. Also at just 0.6% the nation has very low inflation.

Switzerland is not attracting money due to high interest rates – like all the other major nations they have negative real interest rates (its benchmark rate is just 0.25%) – the franc is attracting money because it’s by far the best house in a bad neighborhood.

New Gold-backed Franc

Later this year the Swiss Parliament is expected to discuss the creation of a gold-backed franc which they plan to introduce in parallel with the official Swiss franc – a move which I just don’t see working.

If there are two Swiss francs available – one backed by gold and one not – it’s hard to imagine anyone accepting the one that isn’t backed by anything in favor of the one that is. It is therefore possible, perhaps even likely, that the demand for the gold backed franc would quickly give it prominence and that the Swiss authorities would eventually be forced to ditch the paper (fiat) version – an act that would return them to a de facto gold standard.

 

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