Moves by the Swiss National Bank to curb strength of the Swiss franc will fuel investors' insatiable demand for gold, adding to its relentless rise to new record highs as confidence in the franc as a safe store of value dwindles.
Analysts say this could help gold vault $2,000 an ounce within the coming weeks, with the potential for very large spikes if risk aversion on financial markets gains momentum.
The Swiss franc has fallen sharply from record highs since the SNB bank vowed on August 10 to take steps to curb franc strength. The Swiss central bank has flooded the franc market with liquidity and sold the currency via swaps on the forward market to dim its appeal.
Since that date, gold priced in Swiss francs has spiked. This reversed a trend over recent months when Swiss franc-denominated gold stayed relatively steady as gold in other major currencies hit a string of record highs.
While gold in euro, sterling and dollar terms was really skyrocketing, gold in Swiss franc terms wasn't doing much, and that's telling us that the Swiss franc was being seen as a proxy to gold, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
Now we've seen an enormous spike in Swiss franc-denominated gold, which may indicate that the SNB has succeeded in causing the Swiss franc's proxy status to gold to become unhinged.
Swiss franc-priced gold has risen nearly 20 percent since the SNB's announcement, hitting a record high for the first time since June 2010 near 1,500 francs ($1,908) an ounce. Spot gold has climbed just over 8 percent to record highs just below $1,900 an ounce in the same period.
With concerns about high U.S. debt and a weak economy denting the appeal of the dollar and intervention by Japanese authorities weighing on the yen, the SNB's measures remove the franc as the remaining accessible safe-haven currency, boosting demand for gold.
Given that even the Swiss are considering adding liquidity to the market, gold as a currency that can't be printed has a certain attraction, said David Jollie, an analyst at Mitsui Precious Metals.
Maurice Pomery, an analyst at consultants Strategic Alpha, said that now the SNB have turned off the safety valve, gold could surpass $2,000 an ounce within two weeks, while silver will also gain.
Analysts say gold's appeal is enhanced as the SNB's actions have caused short-term deposit and money rates in Switzerland to turn negative.
Gold usually does well in currencies that cut rates and have negative real rates, said Tobias Merath, an analyst at Credit Suisse. If you get a negative nominal yield on government paper and a zero yield on gold, then gold looks more attractive.
WEAKNESS ACROSS THE CURRENCIES
Once seen as a hedge against weakness in the dollar, gold is increasingly perceived as an alternative to paper currencies in general as central banks seek to keep their currencies weak via quantitative easing or through intervention -- described by some as currency wars.
Central bank intervention in currency markets typically has a significant effect on gold prices. Gold priced in Japanese yen rallied nearly 9 percent to a then-record high near 140,000 yen ($1,836) an ounce in the week after the Bank of Japan intervened to curb strength in the currency on August 4.
Gold prices have hit record highs in recent weeks in all major currencies -- U.S. dollars, yen, euros and sterling -- as well as major commodity currencies such as the South African rand, Canadian, New Zealand and Australian dollars.
The devaluation of major currencies cannot be seen in currency rates - except until recently against the Swiss franc - because all currencies have been losing value, but it can be seen in their value against gold.
Bank of New York Mellon currency strategist Simon Derrick argues that gold's long-term ascent that began in 2001 coincided with the Bank of Japan's quantitative easing program that began that year and went on until 2006.
Gold is a flight from currency debasement, BNYM's Derrick said. It's not gold going up, it's developed currencies going down.