ON
THE RECORD:
An Examination of Evidence Indicating Exchange
Stabilization Fund and Federal Reserve Gold Market
Activity - PART 1
The Gold Anti-Trust Action Committee (GATA) believes that the Exchange Stabilization
Fund, under the authority of the President and Treasury Secretary has been used
to surreptitiously manipulate the price of gold. The following report is an
examination of pertinent evidence against the ESF, as well as information implicating
the Federal Reserve in a scheme to artificially depress bullion prices.
Accounting regulations
devised by the International Monetary Fund are also scrutinized. The report
draws mainly from government documents, previous GATA commentaries and other
publicly available material. The only reasonable conclusion is that U.S. government
denials of gold market activity are false.
The U.S. Treasury explicitly denies that the ESF has been used for gold market
interventions. On the “Frequently Asked Questions” section of their
website, the following claim is made: "The ESF has not been used to manipulate
gold prices. In fact, the ESF has not held gold since 1978."
See http://www.treas.gov/education/faq/international/goldsilver.html#q2
This assertion was also made in Howe vs. Bank for International Settlements,
et al:
Although unnecessary at this
juncture, the Secretary specifically denies
that the Treasury or the ESF
since 1978 has traded in gold or gold derivatives
for the purpose of influencing
the price of gold or the exchange value of the
dollar. In fact, the ESF has
not held any gold since 1978.
(Memorandum of Secretary of the Treasury in support of Motion to Dismiss-filed
March 15, 2001)
See http://www.zealllc.com/files/HvBD0001.pdf (page 3, footnote
4.)
The claim that the ESF has not traded in gold since 1978 seems to be contradicted
by other government documents. For example, the following can be found in U.S.
Treasury Directive TD 27-04 (www.ustreas.gov/regs/td27-04.htm),
dated November 17, 1996, describing the functions of the Office of Under Secretary
(International Affairs) and the duties of the Deputy Assistant Secretary (International
Monetary and Financial Policy) (part 5.h):
Provides direction to the Federal Reserve Bank of New York concerning Exchange
Stabilization Fund (ESF) operations under the authority of the Secretary of
the Treasury and other Treasury officials who are delegated such authority to
assure that operations of the Federal Reserve System concerning the ESF are
coordinated. In this regard, the incumbent intensively monitors foreign exchange
markets and maintains continuing monitoring of gold markets and related developments.
[Emphasis Supplied.]
Why does the incumbent "maintain(s)continuing monitoring of gold markets
and related developments”? The preceding sentence provides the answer:
"... to assure that operations of the Federal Reserve System concerning
the ESF are coordinated.” (It should be noted that the New York Fed acts
as the fiscal agent for the ESF.)Though this directive does not prove that any
specific intervention occurred, it nonetheless strongly suggests that the ESF
was far more concerned with the gold market than the Treasury has contended.
After all, why would they monitor a market in which they purportedly have not
traded since 1978? Logically, monitoring a market is ineffective if no action
is contemplated pursuant to such observation.
As noted above, the Treasury claims that, "The ESF has not held gold since
1978." This is demonstrably false. The Federal Reserve's Statement of U.S.
Reserve Assets for January 2001 contains the following line item: "Gold
Stock, including Exchange Stabilization Fund."
See http://www.federalreserve.gov//Releases/bulletin/0101assets.pdf.
Keep in mind that one month earlier, Reg Howe filed suit against (among others)
the Secretary of the Treasury. That might explain why the above line item was
altered for the February 2001 Statement of U.S. Reserve Assets to read: "Gold
Stock."
See http://www.federalreserve.gov//Releases/bulletin/0102assets.pdf.
As is apparent, the Federal Reserve removed the explanation, "including
Exchange Stabilization Fund.” No reason was provided when the line
item was altered. More importantly perhaps, the Fed has stonewalled repeated
inquiries asking why this change was made. While Fed officials have responded
to letters on the subject, at no point have they explained the rationale behind
the removal of the ESF reference.
The Fed did not simply remove the reference to gold held by the ESF. As James
Turk observes in “What is Happening to America’s Gold?” (http://www.fgmr.com/whatgold.htm):
ON THE RECORD:
An Examination of Evidence Indicating Exchange Stabilization Fund and Federal
Reserve Gold Market
Activity – Part 2
As detailed in “Behind Closed Doors” by James Turk,(http://www.gata.org/bcd.html)
GATA believes that American gold has been used as collateral in order to obtain
foreign gold, which has subsequently been lent or sold to depress prices. This
theory is based on three important facts. First of all, as evidenced by the
above FOMC transcripts, the ESF (and possibly the Fed) has conducted gold swaps.
Secondly, the U.S. Mint, which serves as custodian for the U.S. reserve, reports
that the entire gold stock is intact. Finally, Wayne Angell made specific note
of the fact that the “swap puts” were attached to “our gold.”
Therefore, any gold swaps could have only involved trading the ownership of
American gold for bullion in another central bank’s vault. This is preferable
to directly selling American reserves, in which case the Mint would be forced
to report a drawdown at the nation’s bullion depositories. A gold
swap allows the Treasury to mobilize gold without raising the alarm of those
who audit the Fort Knox, Denver and West Point vaults. With this in mind, a
remark by Alan Greenspan in a 1998 House Banking Committee hearing is illuminating:
Nor can private counterparties restrict supplies of gold,
another commodity whose
derivatives are often traded over-the-counter, where central
banks stand ready to
lease gold in increasing quantities should the price rise.
[Emphasis Supplied.]
See http://agriculture.senate.gov/Hearings/Hearings_1998/gspan.htm.
He elaborated on this statement in a letter to Senator Lieberman dated January
19, 2000:
This observation simply describes the limited capacity of private parties to
influence the gold market by restricting the supply of gold, given the observed
willingness of some foreign central banks -- not the Federal Reserve -- to lease
gold in response to price increases. [Emphasis Supplied.]
See http://groups.yahoo.com/group/gata/message/346.
Greenspan’s statement supports GATA’s theory. For the most part, GATA
does not believe that an ESF-led scheme to manipulate gold prices involves directly
selling significant portions of U.S. gold.
Rather, the ESF was used to set up the swap lines with foreign central banks. Therefore, when the Fed Chairman remarks that “some foreign central banks…lease gold in response to price increases”, it is entirely possible that the ESF has outstanding gold swaps with those nations. So while another country’s gold is being leased in response to price increases, it could be at the behest of the U.S.
After all, how
has Alan Greenspan “observed (a) willingness of some foreign central banks
to lease gold in response to price increases?” His awareness of their leasing
practices would be guaranteed if the ESF and/or Federal Reserve were essentially
directing such operations.
Bolstering GATA's claim that gold swaps have jeopardized the ownership of a
substantial portion of the U.S. reserve is an accounting change made in September
2000. The U.S. Mint reclassified approximately 1700 tonnes of gold at West Point,
New York to "Custodial Gold Bullion" from "Gold Bullion Reserve.”
See http://www.fms.treas.gov/gold/00-08.html
for the August 2000 Status Report of U.S. Treasury-Owned Gold and
http://www.fms.treas.gov/gold/00-09.html
for the September 2000 report.
The Mint did not explain why the West Point gold was re-classified and the gold
at Fort Knox and Denver was not. But before they could be pressed on the issue,
in July 2001 the Mint re-designated 94% of the U.S. gold reserve as "Deep
Storage.” Once again, no reason was provided for the accounting change.
See http://www.fms.treas.gov/gold/01-05.html
for the July 2001 Report.
In “Behind Closed Doors”, James Turk explains the logical relationship
between Mattingly’s gold swaps remark and the reclassification of the West
Point gold:
The Treasury has
gold in West Point. The Bundesbank has gold in Europe. The
Treasury cannot directly do a deal with
the Bundesbank because unlike the ESF,
the Treasury is subject to Congressional
oversight. So instead the Secretary of the
Treasury and the President decide to use
the ESF to set up a swap line for gold with
the Bundesbank.
By so doing, the
gold in the Bundesbank's vault in Europe becomes ESF gold, to do
with as they please - i.e., the ESF lends
this metal to bailout certain bullion banks.
And the Bundesbank now owns the gold in
West Point, which as a result was
purposefully re-classified from Gold Bullion
Reserve to Custodial Gold because the
Treasury no longer owns this gold, having
swapped it out through the ESF in
exchange for gold in Europe owned by the
Bundesbank. Case closed. The mystery of
the abnormally low gold price is solved.
The ESF did it.
On May 23, 2001 at a House Financial Services Committee hearing, Treasury Secretary
O’Neill was asked about gold swaps by the ESF. His exchange with Rep. Ron
Paul (R-Texas) follows:
Dr. Paul: Recently
there were some minutes released from a discussion with the
Federal Reserve that occurred in 1995 dealing
with the Mexico City bailout, and in
this discussion they recognized that the Exchange
Stabilization Fund could be
involved in gold swaps, and this was recognized
as being legal.
The question also
came up whether or not there were any other agreements made,
other than the one that was currently pending
with Mexico, and the answer to that was
yes, indeed, we had a swap arrangement with the
Bundesbank.
My question to
start with is: did that swap arrangement deal with a gold swap, and
does it continue to exist? I would like that
answered in light of the fact that up until
August of the year 2000, the status report on
the U.S. Treasury gold always reported
that gold at the West Point Reserves, the amount
was 1,710 tons, was called gold
bullion reserves. In September that label changed,
and it changed to custodial gold.
During that same period of time, the Bundesbank
also had a reduction of gold that
they held by 1,700 tons.
I would like to
know what is the connection between these two events, and what does
this all mean? Do we have gold swaps with Germany,
and could we have a little bit of
transparency so I can better understand this
process?
Mr. O'NEILL. Well,
I will tell you, I would not probably be in a position to answer
any of these questions except for the fact that
on Sunday night when I was working
through my briefcase, I found a report that it
is my duty to transmit to the Congress
providing the information on the most recent
examination of the Exchange
Stabilization Fund. Indeed, this was a fund set
up in the Roosevelt Administration in
1934 for the express purpose of protecting the
American financial system from the
vagaries of the rest of the world's finance systems.
Just as you say, it is empowered to
operate in gold and in currencies, and there
is a substantial latitude as to how this
arrangement can work.
My memory is that
last year there was one transaction. It was a fairly small
transaction involving an agreed intervention
vis-a-vis the yen. It was the only
transaction last year. I can assure you, and
we will make sure you get a copy of this
report, that I found the report really quite
complete in its documentation of what was
done in the past year.
I don't know the
1995 circumstance. In fact, the funds in the Exchange Stabilization
Fund are marks and yen, and, if I can say it
this way, attributed dollars. But the U.S.
Government does still have gold reserves, and
just by coincidence, Chairman
Greenspan and I were talking about those reserves
this morning. It turns out, by his
best recollection—I didn't check, because
I assumed that his recollection is always
right—but, he was noting this morning that
the U.S. holdings of gold are some $80
billion, which I observed is just about the same
as Bill Gates' net worth, for whatever
that is worth.
In any event, we
will get you a copy of the Exchange Stabilization Fund report, and if
there are additional details you would like to
have, I would work with you to see if we
can't get them for you.
See http://commdocs.house.gov/committees/bank/hba72724.000/hba72724_0.htm
It’s on the public record. Rep. Paul asked, “Do we have gold swaps
with Germany…?” That’s a straightforward question that the Treasury
Secretary could easily answer. But rather than respond to the Congressmen’s
inquiry, O’Neill ducked the issue entirely. However, he may have provided
a subtle hint as to gold market activity by the ESF. The Secretary told Rep.
Paul:
Just as you say, it is empowered to operate in gold and in currencies, and there
is a substantial latitude as to how this arrangement can work. [Emphasis supplied.]
Considering the Treasury’s denials of ESF gold market activity, it is rather
odd that O’Neill would emphasize the ability of the fund to operate in
the metal.
The belief that
gold swaps have jeopardized the ownership of a significant portion of the U.S.
reserve was further substantiated in an essay by James Turk entitled, “Accounting
for the ESF’s Gold Swaps.” (Available at http://www.gata.org/esf_gold.html)
Turk uncovered what appears to be a gold liability of up to $20 Billion in the
Consolidated Financial Statements of the U.S. Government. In “The Investment
Case for Gold”, (http://www.tocquevillefunds.com/press/archives.html?id=24)
highly successful gold mutual fund manager John Hathaway assessed the implications
of Turk’s discovery:
However, valuable insight is provided by the work of James Turk
in “Accounting
for the ESF’s Gold Swaps” (1/7/02 Freemarket Gold &
Money Report.) While
his complex analysis of the mechanics and the accounting may be
less than
perfect, it is in my opinion substantially on the money. The bottom
line is that
US government official gold reserves have been mobilized through
swap and
loan arrangements to suppress the gold price, particularly in the
aftermath of
the Sept. 1999 Washington Agreement, which triggered a violent
short
squeeze. [Emphasis Supplied.]
Hathaway’s contention that the U.S. suppressed the price of gold “in
the aftermath of the Sept. 1999 Washington Agreement” is credible given
the following statement attributed to Edward A. J. George, Governor of the Bank
of England:
We looked into the abyss if the gold price rose further. A further rise would
have taken down one or several trading houses, which might have taken down all
the rest in their wake. Therefore at any price, at any cost, the central banks
had to quell the gold price, manage it. It was very difficult to get the gold
price under control but we have now succeeded.The U.S. Fed was very active in
getting the gold price down. So was the U.K.; [Emphasis Supplied.]
See Paragraph 55 in Howe v. Bank for International Settlements, et al., United
States District Court for Massachusetts, No. CV-00-12485-RCL (www.goldensextant.com/Complaint.html#anchor3130)
Paragraph 60 of the Complaint provided further evidence demonstrating that Greenspan
was concerned about a rising gold price:
Canadian Imperial Bank of Commerce ("CIBC"), which apparently has
assumed overall responsibility from Goldman for managing Ashanti's hedge book,
is advising Ashanti regarding sale of a 50% interest in its Geita gold project
in Tanzaniato to AngloGold. This transaction, which became unconditional on
November 30, 2000 is expected to close by December 15, required the approval
of Ashanti's bullion banks and its shareholders, including Lonmin and the Government
of Ghana.
According to reliable
reports received by the plaintiff, representatives of CIBC held discussions
with Fed officials while this transaction was pending. In the course of these
discussions, Mr. Greenspan's desire to hold down gold prices was expressed.
Ashanti's financial problems presented a major risk not only to its survival
but also to the balance sheets of its bullion banks. [Emphasis Supplied.]
See http://www.goldensextant.com/Complaint.html#anchor3130
One other official institution, over which the U.S. Treasury has considerable
influence has distinguished itself with questionable accounting practices. In
October 1999, less than one month after the post-Washington Agreement gold price
explosion, the Statistics Department of the International Monetary Fund published
a document entitled, “The Macroeconomic Statistical Treatment of Securities
Repurchase Agreements, Securities Lending, Gold Swaps and Gold Loans.”
(See http://www.imf.org/external/bopage/pdf/99-10.pdf
) This draft paper, discovered by GATA consultant Michael Bolser recommended
that central banks record as a reserve asset gold that had left their vaults
by way of a swap. Simply put, member nations would be advised not to differentiate
between gold in the vault and gold receivables.
With the above in mind, GATA supporters around the world posed the following
question to the IMF in October 2001:
Why does the IMF
insist that members record swapped gold as an asset when a legal change in ownership
has occurred?
See http://groups.yahoo.com/group/gata/message/903
The IMF responded
that:
This is not correct:
the IMF in fact recommends that swapped gold be excluded from reserve
assets. (See Data Template on International Reserves and Foreign Currency
Liquidity, Operational Guidelines, para. 72, http://dsbb.imf.org/guide.htm).
[Emphasis Supplied.]
See http://groups.yahoo.com/group/gata/message/904
A footnote on the central bank of the Philippines website contradicts the IMF’s
claim:
Beginning January 2000, in compliance with the requirements of the IMF's reserves
and foreign currency liquidity template under the Special Data Dissemination
Standard (SDDS), gold swaps undertaken by the BSP with non-central banks
shall be treated as collateralized loan. Thus, gold under the swap arrangement
remains to be part of reserves and a liability is deemed incurred corresponding
to the proceeds of the swap. [Emphasis Supplied.]
See http://www.bsp.gov.ph/statistics/sefi/fx-int.htm
Responding to an inquiry, the European Central Bank also revealed that swapped
gold was to remain a reserve asset. The ECB wrote:
You have asked
us about the IMF recommendation in cases where the ECB engages in gold swaps.
Following the recommendations set out in the IMF operational guidelines of the
"Data Template on International Reserve and Foreign Currency Liquidity"
which were developed in 1999, all reversible gold transactions, including gold
swaps, are recorded as collateralised loans in balance of payments and international
investment position statistics. This treatment implies that the gold account
would remain unchanged on the balance sheet. [Emphasis Supplied.]
The Bank of Finland
and the Bank of Portugal also confirmed in writing that swapped gold remains
a reserve asset under pertinent IMF regulations.
The influence of IMF recommendations for gold swaps, loans and deposits should not be underestimated. For example, on its balance sheet the German Bundesbank lists "Gold and Gold Receivables" as a one line item.
(See http://www.bundesbank.de/vo/download/gb/2001gb_bbk_en.pdf.)
This approach is in direct conflict with Generally Accepted Accounting Principles
(GAAP), which the central bank is obligated to follow as per German banking
law. (See Section 26 (2) of the Bundesbank Act-available at http://www.bundesbank.de/presse/download/bbkgesetz0902.pdf.)
In response to
an inquiry, the Bundesbank justified their accounting treatment on the grounds
that IMF rules take precedence over domestic law. The effect is obvious: from
published financial statements there is no possible way to determine how much
gold Germany holds in its vaults. The refusal of the Bundesbank to provide a
breakdown between physical gold and gold receivables belies any notion of market
transparency.
GATA believes that the implications of IMF accounting procedures for reversible gold transactions are very significant. Clearly deceptive accounting, countenanced by the IMF has allowed official sector gold to hit the market without a corresponding drawdown on the balance sheets of central banks.
This has made it
impossible for analysts to ascertain the exact size of official sector gold
loans, swaps and deposits. The unwillingness of central banks to provide even
a minimum level of transparency suggests that total gold receivables are substantially
larger than the accepted industry figure of approximately 5,000 tonnes. Macroeconomist
and former World Bank consultant Frank Veneroso contends that 10,000-15,000
tonnes of gold have left central bank vaults via loans, deposits and swaps.
(His rationale is thoroughly explained in a presentation available at http://www.gata.org/FV.pdf.)
GATA believes that much of the difference between the total endorsed by the
World Gold Council and that of Frank Veneroso can be explained by secret Exchange
Stabilization Fund gold swaps.
Years before official
sector gold market intervention began in earnest, a future U.S. government official
described, by implication the telltale sign that the gold market was being controlled.
In 1988, Harvard president and former U.S. treasury secretary Lawrence H. Summers,
then Nathaniel Ropes professor of political economy at Harvard, co-authored
with Robert B. Barsky an article entitled "Gibson's Paradox and the Gold
Standard" published in the Journal of Political Economy (vol. 96, June
1988, pp. 528-550). A principal conclusion of the article is that in a genuinely
free gold market unaffected by "government pegging operations," gold
prices will move inversely to real long-term interest rates, rising when real
rates fall, and falling when real rates rise.
A commentary on
this article published in August 2001 at The Golden Sextant (www.goldensextant.com/commentary18.html#anchor196905)
includes the chart reproduced below depicting real long-term interest rates
(30-year T-bond yield minus 12-mos. cumulative CPI) and gold prices (inverted)
since 1977. As the commentary points out:
Gibson's paradox
continued to operate for another decade after the period covered by
Barsky and Summers. But sometime around 1995, real long-term interest rates
and inverted gold prices began a period of sharp and increasing divergence that
has continued to the present time. During this period, as real rates have declined
from the 4% level to near 2%, gold prices have fallen from $400/oz. to around
$270 rather than rising toward the $500 level as Gibson's paradox and the model
of it constructed by Barsky and Summers indicates they should have.
The
historical evidence adduced by Barsky and Summers leaves but one explanation
for this breakdown in the operation of Gibson's paradox: what they call 'government
pegging operations' working on the price of gold. What is more, this same evidence
also demonstrates that absent this governmental interference in the free market
for gold, falling real rates would have led to rising gold prices which, in
today's world of unlimited fiat money, would have been taken as a warning of
future inflation and likely triggered an early reversal of the decline in real
long-term rates.
An internal report
by the Royal Bank of Canada (available at http://www.gata.org/RBCReport.html)
perhaps best described the information indicating that the price of gold has
been manipulated. After listing eleven (11) independent pieces of evidence proving
“unsustainable gold price manipulation”, the report stated:
One or two of these
factors could be viewed as random, but the full body of evidence is overwhelming.
October 29, 2002
Andrew Hepburn, Gold Anti-Trust Action Committee
Email: wamwad@sympatico.ca