Trade imbalances caused by gold flows reflect global demand, not national fundamentals – Swiss National Bank

Thu April 10 2025

The global market will inevitably distort the trade balances of major gold hubs like Switzerland, which necessitates a careful separation between Swiss fundamentals and global economic and financial shifts, according to a new study from the Swiss National Bank (SNB).

In the recently published ‘Gold as a safe-haven asset and the Swiss external sector’, SNB Senior Economist Laurence Wicht unpacks the economic and financial factors that drive gold flows from Swiss vaults to their trading partners around the world, arguing that “the safe-haven motive of global gold demand distorts key indicators of the Swiss external sector,” which is amplified during times of global stress. And while the article focuses on the particularities of the gold market, it is also a useful illustration of the complexities that drive international trade imbalances, and the dangers of simplistic analysis and conclusions based on them.

Wicht points out that Switzerland is a major hub of the gold trade, with large refineries supplying one-third of the global output of refined gold worldwide, while also ranking as the fourth largest issuer of gold exchange-traded funds (ETF).

“Because of these activities, Switzerland’s gold imports and exports are substantial,” she said. “In 2024, gold accounted for 27% of goods trade value, making it Switzerland’s most traded product, ahead of pharmaceutical products with a share at 22%. Given its weight in goods trade, gold has a substantial influence on Switzerland’s external sector (SNB, 2015), while its industry has a much more modest impact on the real economy, accounting for only about a thousand jobs (ASFCMP, 2025).”

“This note documents how the safe-haven characteristics of gold systematically shape Swiss gold trade, which in turn distorts external sector indicators for Switzerland,” she writes. “The conclusions of this note thus underscore the need for caution when interpreting Switzerland’s external sector statistics.”

Wicht offers two key facts about the Swiss gold trade as a starting point. First, “Switzerland’s net gold imports vary substantially from year to year,” she noted. “Chart 1 shows that over the past two decades, Switzerland has been a net gold importer—that is, larger quantities of gold were imported than exported. However, yearly net imports have varied substantially, ranging from 240 tonnes (in 2013) to 1200 tonnes (in 2009).”

Secondly, Swiss gold exports towards the US and the UK occasionally surge higher. “Chart 2 shows Swiss gold exports across trading partners,” Wicht said. “Over the past two decades, India, China, and Hong Kong have been the top three export markets, accounting for the majority of Swiss gold exports. Periodically, however, gold exports surged to the US and the UK, ranging between 26 tonnes (in 2018) and 649 tonnes (in 2020).”

Wicht said these two key facts are directly linked to the two main motives of global gold demand. “First, gold is used as a store of value. This motive is particularly relevant in emerging market and developing economies (EMDEs). In these countries, long-term gold holdings—either in the form of jewellery or bars—are sought out given a lack of investment opportunities, limited access to the financial system, and cultural factors.”

“Second, gold is considered a safe-haven asset at times of global economic and financial uncertainty or stress,” she wrote. “A few advanced economies (AEs), which issue the majority of gold backed financial instruments, play a key role in meeting that motive of gold demand.” As an example, Wicht noted that in 2024, the U.S., UK, and Switzerland accounted for more than 75% of the gold backing exchange-traded funds.

“Importantly, gold price also tends to increase in times of global stress, thus exacerbating developments in gold demand in terms of value,” she said. “These motives of global demand thus arise at specific times and in specific markets, in turn driving the two stylised facts shown above.”

To explore this relationship, Wicht constructed a global conditions measure consisting of a range between the minimum and maximum values over three indices: “[T]he VIX (a go-to indicator for investor sentiment and risk appetite), the risk aversion index of Bekaert et al. (2022) as well as the economic uncertainty index of Jurado et al. (2015). An increase in the range captures worsening global conditions, thus broadly indicating periods when the safe-haven motive of gold demand is likely to be exacerbated.”

Chart 3 shows the changes in global conditions against the two stylised facts of Switzerland’s gold trade.

“In ‘bad times,’ when risk appetite is low, uncertainty is high, and the economic outlook is bleak, Switzerland’s gold trade shifts towards the US and the UK as well as towards the domestic market (that is, net imports increase),” she noted. “In ‘good times,’ when risk appetite is high, uncertainty is low, and the outlook is favourable, Switzerland’s gold exports instead revert to the other markets, i.e., the export share to the US and the UK as well as Swiss net imports decrease.”

Wicht said that based on this analysis, “the co-movement between global conditions, Swiss net gold imports, and the export share to the US and the UK is evident. The US, the UK, and Switzerland stand out in times of global stress because they are financial hubs, playing a key role in supplying gold-backed financial assets. When global conditions worsen, the demand for gold-backed financial instruments increases, in turn leading to a rise in the gold holdings required to back these instruments.”

The way that financial markets drive Swiss gold trade flows becomes clear when looking at the country’s gold exports to the United States.

“Chart 4 plots Switzerland’s monthly gold exports to the US and gold holdings registered at the New York Commodity Exchange (COMEX), the world’s largest exchange for gold derivatives,” Wicht said. “Swiss gold exports tend to rise together with increases in gold holdings registered at COMEX.”

Two episodes clearly illustrate this relationship. “First, beginning in March 2020 at the onset of the COVID-19 pandemic, gold holdings registered at COMEX shot up, increasing by almost a thousand tonnes,” she wrote. “At the same time, Swiss gold exports to the US surged. Switzerland exported a total of 516 tonnes to the US in 2020—a sharp contrast to previous years, in which gold exports were negligible.”

“Second, in recent months, gold exports again skyrocketed by a whopping 414 tonnes between December and February while gold holdings registered at COMEX sharply increased.”

“Changes in global conditions thus systematically shape Switzerland’s gold trade,” Wicht said. “This has two important implications for the interpretation of Swiss external sector indicators.”

First, the global gold trade distorts the Swiss current account (CA) balance. “As mentioned earlier, movements in net gold imports are reinforced by movements in the gold price in times of global stress,” she noted. “These two factors thus induce sizeable fluctuations in the CA balance. Chart 5 plots the official CA balance together with a simple ‘smoothed’ CA balance, which is stripped out of the deviations of gold net imports from their average. The smoothed measure removes the volatility induced by the safe-haven motive of global gold demand.”

“During periods of global stress—that is, during the global financial crisis, the Euro debt crisis, and at the onset of the COVID-19 pandemic—net gold imports tended to increase, thus pushing down the CA balance,” Wicht said. “Outside of these periods, the CA balance instead tended to be overstated as net gold imports undershot their average.”

The analysis also illuminates another specificity: The “gold trade generates cyclical movements in the CA balance that are independent of Swiss fundamentals and policies but instead reflect shifts in global conditions,” she wrote. “When using the Swiss CA balance to assess economic fundamentals and policies, it is thus important to strip out the cyclical impact of gold trade.”

The second implication is that the gold trade necessarily distorts Switzerland’s bilateral trade balances, as illustrated in Switzerland’s trade balance with the U.S.

“The chart again depicts a ‘smoothed’ measure, which strips out deviations of bilateral gold net exports from their average,” Wicht said. “Periodically, the official and smoothed measures diverge significantly. For instance, the official measure shows a substantial increase in the trade balance in 2020—reflecting the surge of COMEX holdings that was shown in Chart 4—whereas the smoothed measure shows a decline in the trade balance. Given the renewed surge in gold exports in recent months, the official measure once again overshoots the smoothed measure.”

“Contrasting the official and smoothed measures suggests that sudden movements in the trade balance should be carefully examined,” Wicht concluded. “At times, these movements reflect specific shifts in the gold trade balance that are due to independent financial motives—rather than to changes in fundamental economic ties and policies.”

Source: https://www.kitco.com/