It is not a secret on the Forex market that the Swiss Franc is highly correlated with the gold price. In fact, according to CNBC, the leading investment bank in the United States, Goldman Sachs went as far as to say that CHF might become a gold proxy.
In general, AUD/USD and USD/CHF pairs are the most correlated Forex currency pairs with the price of this precious metal. In the case of the Australian dollar, this seems very logical, since Australia is one of the world’s largest producers of gold. Therefore, when the price of this commodity rises, the local companies, as well as the government tends to benefit from increased revenues.
However, when it comes to the Swiss franc the reasons behind its correlation with gold are less obvious. After all, Switzerland is not the world’s major producer of precious metals. Yet, if we go for deeper analysis, we can discover that there are at least two major factors that link the gold prices with the exchange rates of the Swiss franc. Let us go through each of those in more detail.
Large Amount of Gold Reserves
The Swiss National Bank (SNB) has one of the largest gold reserves in the world. The latest reports suggest that SNB holds more than 1,000 tonnes of gold in its possession. In fact, before 2000 the country was in a gold standard when it was required by law that CHF had to be backed by this precious metal. This rule was eventually dropped after the referendum in 2000. This, in turn, allowed the Swiss National Bank to sell some of its gold holdings to invest those sums in other assets.
However, despite those sales, SNB still retains a large number of precious metals in its reserves. In fact, some financial commentators even argue that if Switzerland were to reinstate the gold standard, SNB will be able to back at least 10% of Swiss Francs in circulation by its precious metal holdings.
As a result, when the gold price rises, the reserves of the Swiss National Bank gain more buying power and Swiss franc becomes more attractive to investors and currency traders. In order to better illustrate this relationship, let us take a closer look at this daily gold price chart:
As we can see from the image above, the XAU/USD has made steady gains during the last 18 months of trading, rising from $1,250 to above $1,777 level. This means that in this period the gold price in US dollar terms has risen by more than 42%. Here the obvious question is: how did the Swiss franc respond to those developments? In order to answer this question, let us check this daily EUR/CHF chart:
As we can see from the above diagram, since spring 2019 the Swiss Franc has steadily appreciated against the Euro, with EUR/CHF falling from trading at 1.14 at the beginning of this period to 1.05 by the end of May 2020. During early June 2020 the pair tried to reverse course and break above the downward trend. However, after making some initial gains, the Euro lost momentum, with EUR/CHF giving up most of its recent gains and falling back to 1.0670 level.
So as we can see from this example, there were instances where the Swiss franc has made some serious gains, benefiting from the rise of gold price.
Safe Haven Status
The Swiss National Bank having large gold reserves might not be the only reason for the high degree of the positive correlation between CHF and the price of this precious metal. Here it is helpful to mention that both of those assets do have a safe haven status.
The reason behind this is the fact that gold has traditionally been known as an inflation hedge. When it comes to the Swiss franc, it might not be exactly comparable to precious metals, but for many years, the currency had one of the lowest inflation rates in the world. For the last 25 years, the average Consumer Price Index for Switzerland is below 0.5%. After the 2008 great recession, the general price levels in the country remain mostly flat. Even after 12 years, since this event, the consumer prices remain at the same level as back in 2008.
Another similarity between those two assets is the fact that they do not have any yields. Physical gold or ETF does not pay any interest. Since 2008 the same is the case with the Swiss Franc. At first, the Swiss National Bank reduced rates to zero. However, this step did little to stimulate the inflation rate or weaken CHF. So due to those failures, SNB went even further, moving into negative interest rate territory, setting its benchmark rate at -0.75%. This was mostly proven ineffective.
The reason for this was the fact that, despite all of their power and influence, central banks can not simply enforce the negative interest rates. It makes no sense for commercial banks to pay their customers for taking out loans. At the same time, instead of paying interest to financial institutions for their deposits, customers can simply withdraw their money and put it on current accounts, whey they will not face those charges. So the effective nominal interest rate for millions of savers for their CHF savings is 0%, rather than -0.75%.
So as we can see, despite their obvious differences, gold and Swiss Franc do share some similarities. CHF has proven to be better at holding on to its purchasing power, than nearly all of the fiat currencies in the world. This led to long term appreciation of the currency against its peers. Therefore, the Swiss franc can be a very attractive investment for those investors who are more interested in preserving their purchasing power, rather than hunting for high yields. So this is why CHF is highly correlated with gold prices.