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Goldman Sachs Says Swiss Franc May Have Become Proxy for Gold

With gold prices rallying following the heightened geopolitical tensions in the Middle East in recent weeks, a Goldman Sachs note highlights the possibility that the Swiss franc, which has been in a steep incline against the dollar, is being used as a proxy for gold.

Goldman Sachs Co-Head of Global Foreign Exchange Zach Pandl said in a note Sunday that the Swiss franc had risen in line with gold. The franc was trading at around $1.03 by mid-morning on Monday, while gold recently reached six and a half-year highs, hovering just below $1,560 per troy ounce.

“While the drivers of recent performance are not entirely clear-cut, we believe the surge in geopolitical tensions may have motivated investor demand for CHF, much as it has driven demand for gold,” Pandl said.

The note underlined that the franc was the best performing G-10 currency during the first half of the 20th century despite the Great Depression and two World Wars, drawing attention to the franc’s close relationship with gold which dates back to the early 1900s.

“The Swiss constitution required CHF to be backed by gold reserves until mid-1999, and the country aggressively defended the franc’s parity with gold until 1936, by which point most countries, such as the U.S. and U.K., had already substantially devalued their currencies,” Pandl said.

The note comes amid rising geopolitical risks after Iran’s top military commander Qasem Soleimani was killed in a US airstrike in Baghdad, leading to retaliatory Iranian airstrikes on US military bases. Concerns about the possibility of imminent military confrontation between the US and Iran had led to suggestions that the franc is likely to weaken over 2020 against both the dollar and the euro, yet Pandl said in the note that it “might be too soon to fade just yet.”

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