The Swiss Franc and gold

Spot price of gold, reflecting date of Swiss Franc / Euro peg on September 6th 2011

Yesterday’s resignation of the Swiss Central Bank’s Chairman, Philipp M. Hildebrand, has focused attention on the less than four month old Swiss Franc / Euro peg.

The peg, established on September 6th 2011, locks the exchange rate at a target of 1.2 Swiss Franc per Euro. It reportedly has been very effective at deterring currency inflows into the Franc but I also believe is part of the reason the US Dollar has been so strong as of late and it has impacted the price of gold as well.

How so? Well the chart above show the spot price of gold for the period January 1st 2011 to January 9th 2012. Until September 1st the correlation between the Swiss Franc / US Dollar rate of exchange and spot gold was a negative 0.45; in other words, as the Swiss Franc strengthened gold and the US Dollar moved the other way. This makes perfect sense, as the Swiss Franc was then a credible safe haven play. Money could flow into the Swiss Franc instead of gold or the US Dollar. Since the Swiss Franc has been pegged to the Euro however, the correlation has flipped to a positive 0.34. Does this add to gold’s bullish case? There is already lots of pressure on the Swiss Franc / Euro peg with signs of weakness in today’s trading.

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