Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Gold Freefall Possible because of Swiss Vote

Expect to see gold prices and share prices for gold mining companies like GoldCorp (NYSE: GG) and Barrick Gold (NYSE: ABX) go down the toilet this week. Also expect to see a lot of hand wringing and conspiracy theory spouting on the part of professional gold bugs.

Switzerland’s voters sensibly and intelligently rejected the crackpot measure known as the Save Our Gold initiative which would have required their National Bank to hold 20% of its assets in gold. It would have cost the bank around $540 billion to buy all that gold which would have been a windfall for gold miners like Newmont Mining (NYSE NEM). The initiative would have also made it illegal for the Swiss National Bank to sell gold and to store gold outside of Switzerland.

Around 77% of the Swiss people voted against the measure which was the work of a fringe political party called the Swiss People’s Party. Goldbugs, of course, will claim that the election was rigged by the evil bankers. But the truth is that average people saw through the gold fantasy. One has to wonder what straw they will grasp on next to shore up their shiny fantasies.

Interestingly enough, this vote will probably increase the value of the Swiss Franc by showing that country’s commitment to economic sanity and a modern economic system. The Swiss further strengthened their economy and the franc by rejecting a Socialist Party measure that would have abolished tax breaks for wealthy foreigners called forfaits.

Under the forfait system, foreigners in certain living parts of Switzerland can avoid income and wealth taxes by making lump sum payments to local governments. Around 20 of Switzerland’s 26 cantons (equivalent to an American state or Canadian province) have the forfait. Six cantons have abolished it since 2008. The forfait system is why millionaires and billionaires including Russian mining barons, movie stars and Formula 1 race drivers like to settle in Switzerland.

Big Trucks at a Gold Corp Mine.
Big Trucks at a Gold Corp Mine.

One big loser will be Vladimir Putin who has bet Russia’s future on higher gold prices. This will probably further erode the ruble and drive Russia closer to hyperinflation.

Expect to see a massive sell off in the gold markets because of this move tomorrow. One major result might be hastening gold’s fall below $1,000 an ounce in value which is likely within the next few months. If that happens, expect to see at least one major gold producer declare bankruptcy.