A Swiss referendum on Sunday that could compel the nation's central bank to hold 20 per cent of its assets as gold makes no sense, Citi argues.
The ultra-conservative Swiss People's Party proposed the initiative, called "Save Our Swiss Gold", with the intention of boosting the security and independence of Switzerland in times of uncertainty. The SPP is one of Switzerland's ruling parties.
If the referendum passes, the Swiss National Bank must not only hold 20 per cent of its assets as gold, but it must also repatriate the 30 per cent of its gold stock that is held abroad. There is Swiss gold at the Bank of England and the Bank of Canada.
Furthermore, the SNB must never again sell any of its gold.
If the referendum passes, Switzerland's gold reserves would effectively become worthless and greatly increase economic risk for the tiny European nation, the US investment bank said in a note entitled Gold: A 6000-year-old bubble revisited.
At present, said Citi, the SNB holds 1040 metric tonnes of gold and would need to purchase at least another 1733 tonnes by 2019 to meet the threshold.
But a research paper from Citi has criticised all three aspects of the referendum.
"Requiring a central bank to put 20 per cent of its balance sheet in any single commodity, even if that commodity had meaningful intrinsic value, represents a highly unorthodox and risky investment strategy in our view," the paper said. "If the central bank is to invest in commodities, better to have a balanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity exchange-traded funds or other derivatives."
Repatriating the existing Swiss gold held overseas, meanwhile, "makes little sense to us". "Holding all one's physical assets in one nation means ignoring the benefits of geographic diversification of 'custodial risk'."
But the requirement that the SNB never again sell its gold came in for most criticism, with Citi labelling the measure "quite extraordinary". "It would make the SNB's gold holdings worthless. Making it illegal to sell any of the gold the central bank has now or acquires in the future and enforcing this gold sale ban would effectively make the gold useless as an international reserve.
"The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral," Citi said.
"The gold becomes useless as a store of value of any kind. The gold has no consumption value to the bank.
"Its value is therefore zero."
But it appears at present that all these fears may be academic. Britain's Telegraph reported that the latest poll shows the "No" side ahead at 47 per cent, compared with 38 per cent for the "Yes" vote, with the remainder of voters still undecided.
Now trading at about $US1190 an ounce, gold could jump to more than $US1350 an ounce — an increase of 18 per cent - if the referendum passes, Bank of America predictions show, though the latest polls say this is unlikely.
Gold trade has been muted recently and prices slumped to a four-and-a-half-year low earlier this month on speculation of a "no" vote.
The Citi note's author, global chief economist Willem Buiter, takes a shot at gold bugs in his conclusion: "Even though I view gold as a pure bubble, that bubble may well be good for another 6000 years."
"Its value may go from $US1200 per fine ounce to $US1500 or $US5000 for all I know," he says. "Investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride.
"Whether that is enough to impose it as a requirement on one's central bank is another matter."
