Reprinted with Permission
Gold Shenanigans: Suspicion Shifts to the Treasury
Fed Chairman Alan Greenspan denies that the Federal Reserve sells, leases or trades in gold or gold derivatives. In a letter to Senator Lieberman (Dem., Conn.) responding to questions from GATA, the Fed chairman goes even further: "Most importantly, the Federal Reserve is in complete agreement with the proposition that any such transactions on our part, aimed at manipulating the price of gold or otherwise interfering in the free trade of gold, would be wholly inappropriate."
Apart from the Federal Reserve, the only other arm of the U.S. Government with broad statutory authority "to deal in gold, foreign exchange, and other instruments of credit and securities" is the Exchange Stabilization Fund. 31 U.S.C. s. 5302(b). "Subject to the approval of the President, the fund is under the exclusive control of the Secretary [of the Treasury], and may not be used in a way that direct control and custody pass from the President and the Secretary." 31 U.S.C. s. 5302(a)(2). The Exchange Stabilization Fund is also responsible for administering U.S. holdings of SDRs. 22 U.S.C. ss. 286o, 286p. The Secretary is required to provide detailed monthly financial reports of its activities to the House and Senate Banking Committees. 31 U.S.C. s. 5302(c)(1).
My suggestion that the Fed might be selling gold call options represented an effort to assign some credible motive to the surprise announcement of British gold sales on May 7, 1999. At the time gold was threatening to move above $300/oz. due in part to increasing doubts that the proposed IMF gold sales would be approved. Short positions in gold were thus in considerable peril. The manner of the British sales -- periodic public auctions versus unannounced sales through the BIS -- belied any effort to get top dollar and smacked of intentional downward manipulation of the gold price. All indications are that these sales were ordered by the British government over the objection of Bank of England officials. British Treasury officials provided some spurious reasons for the sales but no persuasive ones, leaving only one logical conclusion: the gold sales were directly ordered by the Prime Minister for unknown political or other reasons. What is more, his reasons are unlikely to have been frivolous. As leading supporters of the proposed IMF gold sales, the British clumsily put themselves in the position of front-running them, and ultimately the British sales were an important catalyst in forcing the IMF to change tack.
These developments led me to hypothesize a scenario in which U. S. officials called on Prime Minister Blair for assistance in containing the gold price while they unwound short positions put in place to cap it. Chairman Greenspan makes no mention in his letter to Senator Lieberman of any activities by the U.S. Treasury or the Exchange Stabilization Fund designed to influence the gold market. In responses to questions propounded earlier by GATA, a representative of the Treasury dodged questions relating specifically to writing or otherwise dealing in gold call options. Surely former Secretary of the Treasury Rubin was aware of these possibilities since his former firm, Goldman Sachs, is Ashanti's principal gold banker and a major purveyor of gold derivatives. Maybe the Treasury will be more forthcoming in its responses to Senator Lieberman.
In the meantime, results of the BOE's fourth auction held this morning are available at www.bankofengland.cp.uk/pressreleases/2000/009.htm. The auction was 4.3 times oversubscribed and the allotment price was US$ 289.50/oz., i.e., all bids over this price were filled and bids at this price were filled on a proportional basis. The allotment price was almost $2 above yesterday's close in New York and $1 over the London spot price ahead of the auction. The results should have been bullish for gold, and it did trade slightly higher in London immediately afterwards. But as soon as the COMEX opened in New York, gold fell back sharply to the $287/oz. level with Goldman Sachs and Chase reported as heavy sellers.
Could it be that the Treasury did not want gold rising with stocks under pressure, not to mention Al Gore facing a big test in New Hampshire? (If I were Senator McCain, I'd take a careful look at the monthly reports filed with the Senate Banking Committee by the Exchange Stabilization Fund.) More importantly, even with reported lease rates quite low, physical gold in size now appears to command a slight premium over paper -- not a good sign for the shorts.
31 January 2000