Most of the world’s gold is refined in Switzerland and gold accounts for around 20% of Swiss exports. This close relationship to gold means that the CHF moves quite closely with gold. 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. Gold is to Switzerland, what wine is to the French. 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.

Swiss National Bank and Gold

Reason behind why there is always a relationship with Gold

The first factor connecting these two major variables (Swiss franc and gold prices) is the huge amount of gold reserves. The Swiss National Bank, or SNB, is one of the world’s largest gold reserves. This comes after the government passed a law requiring the Swiss franc to be supported by gold. The new law was voted on after the country decided to sell some shares of gold. Although SNB has sold most of its gold reserves, the Bank holds about 10% of the Swiss francs in circulation with gold.

The second influential factor is the safe location enjoyed by the Swiss banking system. This is what has affected the positive relationship between the Swiss franc and gold prices. Gold reserves are said to act as a barrier to inflation, and for this reason, it is not surprising that Switzerland has faced very low inflation. Switzerland has been able to maintain its consumer price index at 0.5% for 25 years, with price levels in Switzerland remaining unchanged for 10 to 12 years beginning in 2008. The SNB tried to stimulate inflation or reduce the value of the CHF by lowering interest rates but the move did not yield any positive results. It was so motivated to bring about a change in the inflation rate that the bank sought to introduce a negative interest rate of -0.75%. This, too, proved ineffective. Thus Switzerland chose to operate at 0% interest rate. Switzerland is benefiting from gold prices as the custodian of higher gold reserves, revealing a positive relationship between the Swiss franc and gold prices.

Conclusion

The Swiss National Bank having large gold reserves is the main reason for the high degree of the positive correlation between CHF and the price of this precious metal. There is strong positive sentiment toward gold in Switzerland. 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. Open account and explore this opportunity.