The difficulty lies not so much in developing new ideas as in escaping from old ones.
John Maynard Keynes
Struggling gold miners like Barrick Gold Corporation (NYSE: ABX) could get a surprising helping hand from a very unlikely source: Switzerland’s voters. On Monday the Swiss are scheduled to go to the polls for an unusual national referendum.
The Swiss Save Our Gold initiative would require the Swiss National Bank to keep one fifth of its assets in gold within five years. It would also require the bank to bring all of Switzerland’s gold reserves home. The referendum’s backers believe that this would enhance Switzerland’s national security and economic situation and shore up the Swiss franc.
That would probably be lousy fiscal policy, but it could be a godsend for gold mining companies like Newmont Mining (NYSE: NEM), Barrick Gold Corporation, AngloGold Ashanti Ltd (NYSE: AU), Freeport-McMoRan (NYSE: FCX), and Goldcorp Inc. (NYSE: GG). All of these miners have been struggling with dismal stock prices and rising production costs in recent months. Some of these companies are also cheap; Barrick Gold was trading at $12.93 a share on November 26, 2014.
It could also be very good news for heavy equipment makers like Caterpillar Inc. (NYSE: CAT) and John Deere & Company (NYSE: DE) which supply heavy machinery to the mining industry. More mining means more demand for power shovels, front end loaders, bulldozers and dump trucks because most gold mining these days is open pit mining which requires power shovels and dump trucks.
The Swiss initiative would be great news for them because it would raise the global demand for gold by 70%. To comply with the referendum, the Swiss National Bank would have to buy 70% of the world’s gold production, The Guardian reported. That means the price of gold would go through the roof if this thing passes, and the gold miners’ share prices would follow it.
Okay, the initiative would be great news for gold miners, but it could be a recipe for disaster for the Swiss economy. Among other things, it could make the Swiss franc vulnerable to a currency collapse if the price of gold collapses. It could also create a bubble in the gold market that could wipe out a lot of fortunes.
Investors should hold off on buying cheap gold stocks because of this one though. It is unlikely that the initiative will pass; The Guardian reported that only 38% of Swiss voters supported the initiative.
This initiative should scare us, though, because it demonstrates the danger from economic populism. When people feel economically insecure—as many Europeans do today—they turn to crackpot measures like this. Such monetarist solutions are appealing because they offer a simple solution to complex problems. They also promise to wreak havoc on the economy and harm a lot of innocent people.
Expect to see more of this nonsense in countries around the world, particularly in Russia, where the Putin regime has bought 92.8 tons of gold so far this year for reasons that are unclear. Observers estimate that Russia made 59% of the purchases of gold on the world market between July and September 2014. One reason for this buying might be to raise gold prices and boost Russia’s sagging economy. Russia’s economy is in dire straits because of falling oil prices these days.
Expect to see an extremely unstable gold market for the foreseeable future. Politics will make it that way as global economic instability increases.
If you’re interested in buying something like Barrick Gold or GoldCorp, buy on Tuesday after the initiative. If it doesn’t go through, gold mining stocks are likely to collapse. One thing is clear; gold is no longer a value investment these days because of the madness surrounding this metal.