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The Swiss Franc for close to 100 years has acted as a safe haven currency in times of market uncertainty but many traders and investors have no idea why. So here is the answer.
Switzerland is traditionally seen as a neutral country when it comes to global conflict. In fact the Catholic Church has for centuries entrusted Swiss National Guards to look after the Pope. Young catholic men are recruited for 7 to 9 years and sent to the Vatican to guard the Pope and whilst this is a noble gesture it is not the reason why the Swiss Franc acts as a safe haven currency.
We have to go back to 1934 to discover the reason why the Swiss Franc has become one of the world’s safe haven currencies in times of uncertainty. In 1934 the government of the day brought in a law that made it heavily punishable with prison terms for any Swiss Banker to divulge any information about the banks clients names. Therefore instead of a bank account in Switzerland having a name as we see at traditional banks throughout the world in Switzerland bank accounts only had a number.
So in 1934 the birth of Swiss numbered bank accounts began. Anyone seeking any information about the names of any bank accounts would be politely declined. This of course led to the channelling of hundreds of millions and eventually hundreds of billions of dollars of rich families money into Swiss Banks accounts. The money came from all throughout Europe and as the word spread anyone who wanted to hide money was likely opening a bank account in Switzerland. The Jews, any family with a long line of inheritance was putting money in Swiss Francs and even the Nazi’s were entrusting millions with the Swiss to look after. Of course Switzerland became over decades a tax haven for the super wealthy as they looked to hide money and avoid tax
Switzerland as a Nation has a fortress mentality and is a land-locked country with tunnels into Germany, Italy and France and these tunnels are heavily fortified and mined. At the sign of any invasion these tunnels can be blown up to protect Switzerland and ensure no army can easily cross over into Switzerland. The Swiss see their country as an impenetrable place and this leads to a feeling of safety, and that of course extends into their banking.
In Switzerland it’s not just chocolates and watches being made, banking is a huge industry with financial markets seeing Switzerland as a very low volatility county with virtually no unemployment (3%), very high wages, high standards of living and a very safe banking and financial system. On top of all of this Switzerland is one of the few countries around the world that traditionally has positive trade balance figures which means more money is coming into Switzerland than leaving and thus we have a Swiss Franc that is forever being sought after.
A stable economy, a stable banking system, positive trade balance numbers and a law that was enacted in 1934 that enabled money to be hidden in Switzerland are the real reasons why the Swiss Franc is sought after in times of uncertainty.
On a side note the Swiss also refused to join the European Union they refused to join the Euro and today continue to maintain a high level of independence from the rest of Europe, which is seen as a positive.
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