An article by Jack Farchy in the Financial Times tonight (29 January 2013) has the headline: “Swiss banks lose old taste for gold.” Two powerful Swiss banks, UBS AG (NYSE:UBS) and Credit Swiss, have announced they will no longer store gold for clients and maintain the bullion on their corporate balance sheets. Instead they will store gold only in their clients’ names and collect additional fees to act as custodian.
Does the announcement by the two major players in the huge Zurich physical gold market indicate the they hold the opinion that gold is headed lower?
Gold has not been much of an investment for the past 18 months after reaching an all-time high of $1889.70 in August of 2011.
The 2-year chart for gold shows a flag with declining resistance, the current price sitting right in the middle of the defined range. This flag is especially significant because of the flat support level at the top of the price range for a major consolidation which lasted for three months in 2011, just before the dash to the all-time high.
If that support level is broken a lot of selling pressure would be likely because of the accumulation between $1,500 and $1,550 in 2011. If gold were to break below $1,500 the price could next find support near $1,400 and after that around $1,300. These are significant consolidation prices areas as shown on the chart below.
Other consolidation price areas are shown in the chart above and the ultimate lowest support level is currently between $800 and $900, the extension of the 2003-2005 trend line.
There was a flag that lasted for about 20 years after the precipitous decline of more than 50% from the 1981 peak for gold.
In the case pictured above the flag was resolved with a break-out to the upside. In 2013 we should watch for an upside breakout, currently that would be above $1,760. By year-end the resistance level will not be far from the current price. It is people who look for that kind of price action who are projecting the possibility of the price of gold to double or triple from here.
What are the Swiss Banks Thinking?
So are the Swiss banks seeing some other indicators and that is why they want to move client gold off their balance sheets? Not likely. In fact, it would be a better argument to suggest that they are making the change in anticipation of a move up for gold.
How could that be? Wouldn’t they want their balance sheet to reflect the higher price for gold?
Absolutely not! For those that don’t understand why I will explain.
Gold held by a bank for a customer can be held in either of two ways: (1) as a deposit credited to the customer or (2) as a customer asset held in custody. In the first case the gold appears on the bank’s balance sheet as a liability owed to the client. In the second case there is no bank liability on the balance sheet. The client asset is merely held in custodial storage.
As Jack Farchy explains in his FT article, banks that hold customers’ gold on their balance sheets are increasing the reserve requirement at their central bank. As the increased reserve requirements of Basel III get closer, banks are trimming balance sheet liabilities.
A New Gold ETN
Credit Suisse announced a new ETN (electronically traded note) simultaneously with the change in gold storage policy. The new security (NASDAQ:GLDI) will have a covered call structure. GLDI will enhance current cash flow through premiums on the sale of the call options (against NYSE:GLD). Those premiums will be received monthly in exchange for giving up any gains beyond 3 percent a month. This strategy would be a way to make money from gold if there were another 20-year sideways market in gold as from 1982 to 2002.
Global Economic Intersection – Written by John Lounsbury