Swiss bank chief to respond over wife's dollar trade

Phlilpp Hildebrand, Swiss bank cheif

(Reuters) - Switzerland's central bank chief will break his silence on Thursday over a controversial currency trade made by his wife three weeks before he imposed a cap on the Swiss franc.

Philipp Hildebrand's decision to speak came after the sacking on Tuesday of a bank employee who leaked details of the trade to the lawyer of a political adversary.

The affair goes to the heart of bank secrecy in Switzerland, whose banks are plagued by scandals over their role in tax avoidance by the world's wealthy, but where controversy over the actions of the central banker's wife has been centered on the leak of her private data rather than on the action it revealed.

Kashya Hildebrand, a former trader who also owns a Zurich art gallery, told Swiss television she "felt good" about the deal last August. Local tabloid Blick reported it had yielded a 60,000 Swiss franc ($64,400) profit on a 500,000 franc trade.

"What motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap," she was quoted as saying. "As I have worked in the financial and banking industry for over 15 year and always observe the markets, I felt at ease with this transaction."

The Swiss National Bank has already investigated the trade and said last month it did not breach the letter of internal rules.

On Wednesday, it bowed to political pressure and published internal trading rules for the first time -- alongside a report by auditor Price Waterhouse Coopers (PwC) on the controversial dollar purchase.

PwC said Hildebrand had not known in advance about his wife's dealings on August 15, but that one day later, he told Sarasin in an email all future dealing would need his express approval. He copied in the Swiss National Bank's (SNB) compliance department for good measure.

His caution was well warranted. On September 7 the SNB's compliance department ruled that there should be no repeat of such trades, the PwC report said. The Swiss franc cap was introduced on Sept 9.

"One could call this trade risky," PwC said in the report.

Swiss central bank rules, as well as those from the Bank of England and European Central Bank, put the onus on staff to refrain from unauthorized disclosures rather than on families to avoid trading. But officials said the spirit of guidelines demanded extra sensitivity.

"It may well be completely above board but nevertheless it leaves a bitter taste in the mouth," said one central bank official, who declined to be named.

The SNB said Philipp Hildebrand, a former hedge fund manager and vice chairman of the Financial Stability Board (FSB), would make an announcement on Thursday.

The respected banker, credited with steering Switzerland's banking system through the financial crisis, is expected to weather the storm, and won the backing of the government in a statement late on Wednesday.

"The Federal Council has no reason to question the validity of the audit findings and has expressed its full confidence in Mr. Hildebrand," it said in a statement.

Some said that the scandal was nothing more than a politically motivated attack.

"As long as allegations (of wrongdoing) turn out to be unfounded, which at the moment I think looks likely, it looks like just another attempt to discredit the central bank and its chairman," said Nikola Stephan at Informa Global Markets.

"CONSIDERABLE UNPLEASANTNESS"

In a country which prizes itself on bank secrecy, the fact that the leak breached client confidentiality -- and that the data had found its way into the hands of Hildebrand's political rival Christoph Blocher -- initially took centre stage.

Bank Sarasin (BSAN.S), which said on Tuesday it had fired an IT staffer for the leak of customer data, apologized for the "considerable unpleasantness" caused by its employee, who turned himself over to police on Sunday.

"The bank condemns the misuse of confidential bank data for political purposes in the strongest possible terms," it said.

The data was leaked to the lawyer of Christoph Blocher, a political rival of Hildebrand.

Blocher has called for the central banker's resignation over the losses racked up trying to stem the relentless rise of the Swiss franc as funds seeking a safe haven from the euro zone crisis poured in.

But to date, Blocher, who transformed the right-wing Swiss People's Party into the country's largest political force, has stayed out of the trading embarrassment.

"There is a time to talk and a time to be quiet. In this affair, it is time for me to be silent," he has told Swiss television.

Philipp Hildebrand met Kashya, an American citizen born in northern Pakistan, when they worked as colleagues for the U.S. hedge fund Moore Capital, according to Swiss newspaper reports.

Police raided the London offices of Moore Capital, headed by billionaire Louis Bacon, in 2010, and arrested an equity trader as part of Britain's biggest swoop on an insider trading ring.

($1 = 0.9323 Swiss francs)

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Top Gold Owning Countries of the World - 2011

Gold Bar

Central banks are contributing to world gold demand. The latest data from the World Gold Council indicate even more changes among the nations holding the most in gold reserves. Those are also some of nations whose creditworthiness is now under question during the debt crisis in Europe. 24/7 Wall St. looked at the 13 nations with the highest gold reserves, as well as two institutions, to see how each might affect future gold demand.

While investment demand was the key driver to increased gold demand during the past quarter, it is central bank gold buying and selling that is going to be a key factor for demand ahead. The council projected that central bank demand is expected to continue as creditworthiness woes of western governments has come front and center. In fact, the council also cited many new central bank entrants have emerged as they move to diversify reserves. Further, the council sees this increased central bank activity trend continuing into 2012.

24/7 Wall St. reviewed the top 13 nations that hold the lion’s share of the world’s gold reserves, according to the World Gold Council’s International Financial Statistics. Of course, many nations will have new gold reserve data in 2012. And some of the data remained unchanged from prior months. Our aim here is to show which nations probably are increasing or lowering their gold reserves into 2012 and why.

The European credit crisis and emerging market weakness are what is likely behind central banks’ demand. Total gold demand rose 6% in the third quarter from a year earlier to 1,053.9 tonnes. This equates to roughly $57.7 billion — an all-time high in value terms. Investment was the large driver for increased gold demand, while jewelry demand was soft.

These are The 13 Countries That own The World’s Gold.

13) Venezuela holds 365.8 tonnes.
Venezuela increased its gold reserves by nearly 5%. Hugo Chavez may be no friend to the United States, but oil sales and business nationalization (or seizure) has continued to add more wealth to the nation’s government. Venezuela’s population is only 27 million and it is the sole Latin American country among the top nations holding gold. In 2010, Venezuela bought 3.1 tonnes, according to the World Gold Council. That’s after buying 4.1 tonnes locally in 2009. Venezuela has continued adding gold, and if history is an indicator it is likely to keep adding gold.

12) Portugal holds 382.5 tonnes.
Surprisingly, one of the PIIGS nations (Portugal, Italy, Ireland, Greece, Spain), Portugal, is also a top holder of gold. The European nation has a population of almost 11 million people. Does this go back to the days of its empire building ambitions, or is it because the nation was able to remain neutral in World War II? If Portugal is really in such dire straights, perhaps the Europeans could start demanding that Portugal pledge some of its gold reserves to bolster its finances. Portugal has already been a part of the prior Central Bank Gold Agreement as a seller in recent years, so it seems logical that the nation would be selling to hold up on its debt and entitlement obligations.

11) Taiwan holds 423.6 tonnes.
Taiwan is another surprise as one of the world’s largest gold holders. It has a vast electronics sector, and maybe its high gold holdings help it stay financially relevant in its long ongoing confrontation with China. The nation is already considered wealthier than many neighboring countries on a per capita basis. The accumulation of gold by China makes it unlikely Taiwan would sell much gold now.

10) India holds 557.7 tonnes.
India’s gold holdings are still officially the same as they were at the beginning of the year, but it seems likely that it will increase its central bank holdings. The nation has about 1.2 billion people and its economy is growing — even though the government has fought inflation in 2011. Gold is entrenched in Indian culture that India is likely to continue accumulating more gold. Almost one-third of the world’s jewelry demand comes from India, and the country acquired 200 tonnes of the IMF gold sales in late-2010. India would seem to be a buyer of gold not just in 2012, but in the years ahead.

9) The Netherlands holds 612.5 tonnes.
Another fairly small nation with only 16.6 million people is ranked as a top holder of gold. The nation used to hold even more gold but it was a seller of gold from at least 2003 to 2008 under the Central Bank Gold Agreement in Europe. Maybe Holland could help to create a Dutch-led bailout for the PIIGS in Europe. The country’s gold holdings seem unlikely to change very much in 2012.

8 ) Japan holds 765.2 tonnes.
Japan has had to deal with two decades of a sluggish economy and its currency is currently considered a safe-haven for international investors. The Japanese people are known for keeping cash under their mattresses. The yen feels inflated with its huge debt-to-GDP and no growth. Prices for Japanese goods are getting too expensive for foreigners due to the strength of the Yen. The country is also still recovering from its tsunami and nuclear incident from earlier in 2011. Perhaps Japan will have proven to be a seller in 2011 rather than trying to bolster its foreign currency reserves. If not, it should be.

7) Russia holds 851.5 tonnes.
Russia has been gobbling up gold to bolster the ruble in the past and this appears to be the case this year as well. The new figure of 851.5 tonnes of gold compares to a previous figure earlier this year of 784.1 tonnes. The council had also noted earlier that Russia accumulated some 120 tonnes during the first 10 months of 2010, and that was after adding over 100 tonnes in 2009 and almost 70 tonnes in 2007. The new figure was due to increased purchases after the prior cut-off date. With Russia having vast oil and commodity reserves and with Russia aiming to increase its clout in the world as a financial powerhouse, it seems a shoe-in that it will have proven itself as a buyer of gold into 2012.

6) Switzerland holds 1,040.1 tonnes.
Switzerland already had to take measures earlier this year to halt the appreciation of the Swiss franc. It is hard to imagine that the nation would be buying gold to prop up its currency even after considering reports in recent years that it ran out of places to securely store gold. Switzerland sold gold under the Central Bank Gold Agreement from 2003 to 2008 before the great gold rush. With a mere 7.6 million people, how much gold does the nation really need? This country could easily lighten up on its gold reserves without its benchmark currency status being challenged.

5) China holds 1,054.1 tonnes.
China has added and added to its gold reserves. There is no reason to expect that to abate, particularly after Barron’s pointed that China is seeking a reserve currency status in the generation ahead. China has a population of 1.3 billion people and a fast-growing economy. The country also bought more than 450 tonnes of gold from 2003 to 2009 and 200 tonnes or more during 2010. With the pressure to get away from the dollar peg, assuring the value of the yuan only leaves the purchase of gold or other hard assets.

4) France holds 2,435.4 tonnes.
The French are not in the same boat as Italy and the rest of the PIIGS, but predicting what will happen with France’s gold reserves is very difficult. With a debt rating downgrade possibly coming down the pipe, France is the second largest foundation of the euro and of the European Union. The nation was part of the Central Bank Gold Agreement as a seller, but this was all before the major run-up in gold and before its own finances have come under question during the European debt crisis. It seems that more light selling is expected, although maybe the nation needs more hard assets as a reserve.

3) Italy holds 2,451.8 tonnes.
Italy was in the Central Bank Gold Agreements as a seller, but now it is the largest concern of Europe and of the PIIGS. It would seem that the Italians are unlikely to sell off their gold reserves. However, it is also likely that to fend off weakness some would argue for asset pledges. The nation has a new government and its economic growth is expected to be limited at best. Releasing gold might address some of Italy’s budget gaps and economic problems. Because Italy’s debt problems are quite large, it is likely that it would be a gold seller into 2012. If not, perhaps pledging those holdings is a runner-up scenario.

2) Germany holds 3,401.8 tonnes.
Germany remains the foundation of the European Union and of the euro. The nation was a seller of gold for coins under the Central Bank Gold Agreements from at least 2003 to 2008, but the sales were not really enough to put a serious dent in its gold reserves. It is hard to see Germany being a buyer of gold, but it likely cannot be a large seller either because it is the largest foundation of the euro. Selling too much gold could further pressure the troubled euro. Still, euro bailout funds have to come from somewhere and Germany could sell some additional gold without challenging its No.2 position among the nations holding gold reserves.

1) United States holds 8,133.5 tonnes.
The U.S. has already lost its prized AAA credit rating and it has magically created a vast amount of dollars to support the bailouts and stimulus packages. The U.S. could always try unloading some gold to fight future commodity price pressures, but the U.S. has now reached the point of leverage and deficits that it has to hold hard assets to fend off another challenge to the dollar as the world’s top reserve currency. Any gold sales today would likely have to be countered by large gold purchases in the future.

Looking from 2011 to 2012, Central Banks, Investment and More
The International Financial Statistics on the World Gold Council’s November report shows that the IMF holds 2,814 tonnes of gold. This technically puts the IMF somewhere between Germany and Italy. If the IMF is going to support bailouts and stabilization efforts, it is easy to consider where that money will come from. After all, the IMF cannot exactly print currency. The IMF’s Executive Board approved the sale of 403.3 tonnes in September 2009, which came to about one-eighth of its total gold holdings at the time.

The European Central Bank had some 502.1 tonnes of gold, according to the same November report. This is more than Taiwan, but less than India.

There are some key statistics to consider as 2011 comes to an end. Investment demand rose 33% from a year ago to 468.1 tonnes in the third quarter, worth about $25.6 billion. Central bank demand in the third quarter added 148.4 tonnes, an obvious effort to support currencies and credit ratings.

The world gold supply was up only 2% to 1,034.4 tonnes in the third quarter over a year earlier. Mine production was up 5% to 746.2 tonnes, while recycling activity was up 13% to 379.1 tonnes.

The investment segment showed that ETFs and investments accounted for 77.6 tonnes, but this was dwarfed by actual gold bars at 294.2 tonnes. Official coins came in a close third place at 76.2 tonnes and another 20 tonnes were for medals and imitation coins. European investment demand reached a record quarterly value of 4.6 billion Euros for 118.1 tonnes, a gain of 13%.

Also, watch Chindia. Chinese jewellery demand was 13% higher year-on-year at 131.0 tonnes; China’s investment demand for gold bars and coins rose 24% to 60.2 tonnes. Indian jewellery demand was down 26% in its seasonally slow quarter and it was compounded by high inflation and gold price volatility, although yearly demand at the end of September was called “very close to the record levels seen in 2010.”

If you tally up the top 15 entities here, the total is close to 26,000 tonnes of gold before counting any of the ETF products. The total tonnes of gold reserves from the International Financial Statistics cited by the World Gold Council is 30,708.3 tonnes. The SPDR Gold Trust (NYSE: GLD) lists some 1,277.36 tonnes worth over $71.5 billion today, but that is live data rather than just third quarter data released by the World Gold Council.

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