Switzerland's central bank is flexing its muscles to defend its cap on the Swiss franc. Its battle to fend off deflation - in which it sees the exchange rate as its chief weapon - is already complicated by the slide in the euro that followed European Central Bank easing. Now the SNB is fighting on a new front: to block a populist motion that would force it to almost treble the proportion of reserves held in gold.
At the end of November, Swiss citizens will vote on an initiative that calls on the central bank to hold at least 20 per cent of its assets in gold; to repatriate any gold stored abroad; and to refrain from selling any gold in future.
The "Save our Swiss Gold" initiative - launched by members of the ultra-conservative Swiss People's Party - seeks to tap into a current of Swiss public opinion that is fiercely proud of the country's independence, and unsettled by the economic struggles of its neighbours. But it has drawn criticism from across the political spectrum.
The government has rejected the idea, saying last year that "gold no longer has any meaning for monetary policy". Parliament voted against it by a large majority.
For the central bank, the measures are not merely an anachronism: they pose an immediate threat. Since September 2011, when it promised to buy as much foreign currency as needed to stop the Swiss franc strengthening past SFr1.20 to the euro, the SNB's foreign currency holdings have ballooned - rising from about SFr204bn at the end of 2010 to SFr470bn in August. Despite the difficulty of managing such a rapid increase, the SNB says the minimum exchange rate is still "the key instrument to avoid an undesirable tightening of monetary conditions".
The gold initiative could, if it passed, blow a hole in this policy.
Jean-Pierre Danthine, vice-chairman of the SNB's governing board, said last week that the central demand, to hold 20 per cent of assets in gold, "would severely restrict the conduct of monetary policy". If this limit had existed when the SNB first enforced its minimum exchange rate, he argued, the central bank would have had to buy gold in huge quantities as well as euro - "which would almost certainly have caused the foreign exchange markets to doubt our resolve to enforce the rate".
It is rare for the SNB to take such a stance on what is purportedly a political issue, so these comments show how sensitive policy makers are when it comes to the credibility of their policy on the franc. Thomas Jordan, chairman, said in September the SNB had not had to intervene to enforce the policy since 2012. But the Swiss franc is still trading close to SFr1.20 to the euro - with the euro's weakness and renewed global risk aversion keeping it under upward pressure. There is continued speculation that the SNB may eventually resort to negative deposit rates - as the ECB has done - to keep the currency in check.
The central bank is also deeply concerned about its ability to manage its vast reserves. Mr Danthine pointed out that a ban on gold sales could mean that gold eventually accounted for the bulk of the SNB's assets - it would be obliged to buy gold every time its balance sheet expanded and to sell euro every time it contracted.
He also noted that gold holdings would not earn interest or dividends, and underlined other absurdities inherent in the initiative, such as repatriating gold stored in the UK or Canada, where it could most easily be sold if needed, or stipulating that reserves meant for use in emergencies could not be sold at all.
It is not yet clear whether the measures stand any real prospect of becoming law. Population growth and mass communication have made it easier to gather the 100,000 signatures needed to put initiatives to a public vote in Switzerland, but only 10 of 66 initiatives that have gone to referenda since 2000 have passed. Opinion polls will not appear until later this month, and have proved unreliable before previous votes.
But Scotland's independence referendum last month was a reminder of how rapidly political risks can come to the fore in currency markets. Analysts at Nomura warn that speculators may test the exchange rate floor if initial polling results were to show support for the public vote in coming weeks.
The vote warrants close attention, says Derek Halpenny, a strategist at Bank of Tokyo Mitsubishi. He thinks the SNB could - given a long enough lead-in time - both increase its gold holdings to the level the initiative requires, and maintain its minimum exchange rate. This could have knock-on effects in forex markets, because it would need to convert euro into dollars to fund gold purchases.
Analysts say the other logical possibility - meeting the 20 per cent criterion by shrinking foreign exchange reserves - would make it impossible to enforce the cap on the franc.
In the long term, though, Mr Halpenny argues that "a shift back towards much larger gold holdings would only help reinforce the franc's safe-haven status . . . The imposition of a limit would be seen as reducing the ability of the authorities to devalue the franc in order to lift inflation".
Additional reporting by James Shotter
Copyright The Financial Times Limited 2014