SNB - Speech given by Mr Jean-Pierre Roth, 29-4-2005

Speech given by Mr Jean-Pierre Roth, Chairman of the Governing Board at the General Meeting of Shareholders of the Swiss National Bank on 29 April 2005

The dollar and the oil price as disruptive elements

"...The foreign exchange and commodity markets experienced the most turbulence in 2004. The US dollar, which had been falling since 2001, accelerated towards the end of the year, when it hit a record low against the euro. Switzerland was affected in much the same way as the other European countries: the Swiss franc appreciated by about 7% against the US currency during the last three months of the year. This development has since improved somewhat.
Despite the dollar's sharp drop over the last few months, its current exchange rate is still higher in real terms than it was in the mid-1990s. The current situation is particularly difficult, however, as a whole series of Asian currencies, including the Chinese renminbi, are pegged to the dollar. The greenback's fall has thus reinforced the competitiveness of numerous emerging markets versus the European economies. For us here in Switzerland it has been positive to note that the nose-diving dollar has not unleashed any speculation on the Swiss franc. The Swiss franc-euro exchange rate has remained remarkably stable at around CHF 1.55 per euro. Since the single European currency was introduced on 1 January 1999, the Swiss franc's nominal appreciation has been more than offset by the inflation differential between Switzerland and the euro area. The competitive position of our exporters has thus improved against their European counterparts.
The dynamism of the Asian economies has boosted demand for commodities, notably oil. The soaring price of this "black gold" continues to pose a serious threat to the recovery of the industrialised economies.

Completion of the gold sales

On 31 March, we completed our sales of the 1,300 tonnes of gold no longer required for monetary policy purposes. These sales had begun on 1 May 2000. The fears expressed in some quarters that our gold sales would destabilise the market have proven to be unfounded. By selling the gold in small instalments and according to a fully transparent schedule, we succeeded in assuaging the market's fears. Moreover, our sales strategy and risk hedging also proved effective in financial terms: the 1,300 tonnes of gold were sold at an average price of CHF 16,241 per kilo. This was CHF 700 more than the average market price during the same sales period. An additional profit of more than CHF 900 million was therefore realised.

At the end of the sales programme, the National Bank still held 1,290 tonnes of gold, corresponding to one third of the value of its currency reserves. Even though it has been demonetised, the yellow metal still plays an important role in our reserves. It is an asset category that traditionally affords good protection in times of crises in the international monetary system. It also allows us to hold part of our reserves on our own country, which is not possible with financial assets. Moreover, as expressly requested by Parliament, Article 99 of the Federal Constitution requires the National Bank to hold part of its currency reserves in gold. The Governing Board considers that the holdings of 1,290 tonnes are appropriate to the current international environment. It does not intend to proceed with further sales of gold.

Distribution of profit

This General Meeting of Shareholders will find a special place in the National Bank's annals, as you are going to decide on how the proceeds of the gold sales are to be distributed. This will close a chapter first opened in 1997, when a group of experts came to the conclusion that the SNB's currency reserves were larger than required for the execution of its mandate and that it could thus consider selling half its gold holdings, once the Swiss franc's gold parity was discontinued.

As you know, the Governing Board adopted the expert group's conclusions and indicated to the Federal Council that, based on the profit figure following revaluation, an amount corresponding to half the gold holdings could be earmarked for purposes other than monetary policy.
The possible uses for the sales proceeds have been the subject of much political debate. None of the proposed solutions have succeeded in attracting a consensus among the population or in the Federal Parliament. On 16 December, the parliamentary debate was concluded without an agreement being reached. Thus, a sum of CHF 21.1 billion, corresponding to the proceeds of the gold sales, has been included in the usual profit distribution procedure.

Some people fear that, following this transfer, the National Bank will no longer have sufficient currency reserves. I have a word of reassurance for them. This issue has been examined in depth and has been discussed by our Bank Council. Our currency reserves total CHF 60 billion – an amount which may be considered appropriate by comparison with other industrialised countries.

But nor are these reserves excessive. Furthermore, it is important that the currency reserves evolve over time, in tandem with the size of our economy. This is why, in accordance with Article 99 of the Constitution and Article 30 of the National Bank Act, the SNB has adopted a provisioning policy that provides for gradual growth in its currency reserves. This year, CHF 885 million have been reserved for this purpose, and similar sums will have to be set aside in the future.

The closing of our accounts for 2004 thus brings with it an extraordinary allocation of profit to the Confederation and the cantons. It is important to emphasise that – paradoxically – the distribution of the CHF 21.1 billion accruing from the gold sales does not actually make them any richer. Up to now, the public sector received the income earned on this capital: a sum of CHF 400 million will also be allocated to them from this source this year. As of the beginning of next year, this income will no longer be distributed. As a result, the Confederation and the cantons will gain in terms of capital, but will lose in terms of transfers of interest income. If they use the proceeds of the gold sales to repay their debts, the reduction in financing charges will correspond approximately to the reduction in the profits paid to them by the SNB. In net terms, there will be few – if any – additional funds available for new expenditures. It is therefore important that decision-makers at all levels maintain a rational approach..."

Source: http://www.snb.ch/en/mmr/speeches/id/ref_20050429_jpr/source/ref_20050429_jpr.en.pdf