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Swiss Surrender in Currency War


For the past three years, the Swiss National Bank has kept the Swiss Franc pegged to the Euro so that it did not appreciate too much and make their exports to the rest of the continent too expensive.

To do that, they had to buy a steady stream of Euros and sell an equal amount of Swiss Francs. This was designed to drive down the price of the Swiss Franc. They were successful to the point where the Swiss Franc had weakened significantly. Look at the chart below which is simply the chart of the Swiss Franc with the Euro superimposed over it:


The big question is why did the Swiss change their policy? They are not telling, but given their history as a financial safe haven, my guess is that they see what a crap shoot the Euro has become and did not want to devalue their currency any further.

Unfortunately, there are lots of repercussions:
>Swiss exporters will have their sales fall due to the 20% increase in the cost to a foreign buyer due to 20% increase in value of Swiss Franc;
>lots of Europeans have their home mortgages denominated in Swiss Francs – particularly Hungarians – and they now have mortgage payments that are 20% higher;
>there will probably be a number of corporate and individual bankruptcies in Europe because of this move, which will put capital strains on an already strained European banking system;
>currency traders on the wrong side of this trade (those short the Swiss Franc – and there were $8 billion worth of shorts last week according to an article from Mike Norman) will lose a lot of money; and
>very likely several other issues I have though of yet.

However, one thing that this will do is make Gold break out to the upside. Take a look at the chart of Gold below:


You can see that gold peaked up in October but fell to a low in November. Since then, it has moved higher with the increasing problems in Europe. The move by the Swiss caused the price of Gold yesterday to move above that October high. This is a breakout that could last given the issues the world faces, and provides an opportunity for investors that are watching the geopolitical issues for investment clues.

We are raising our allocation to Gold in client portfolios to 4% from 2.5% with the purchase of Royal Gold. To fund this, we will be lowering our allocation to European equities by 1.5%.

Royal Gold is a royalty company that is leveraged to the price of gold. They own no mines, no mining equipment, and pay no miners. They simply own royalties and as the price of gold rises so does their stock price.

This is a crazy time in the Equity markets. You can count on one hand the number of positive days in the S&P 500 so far in 2015, a much different scenario than 2014. This will be a year where you need to be selective in your investment holdings to focus on companies that are able to drive their stock prices higher even if the broader markets are ratcheting up and down (or mostly down as we’ve had so far this year).

If you have an interest in reading more about my thoughts on 2015 being the year of the stock picker and definitely not the year of the index investor, you can check out this post from about a month ago:

Enjoy your weekend!