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The 'Smoking Gun'
The June 1972 break-in at the Democratic headquarters in the Watergate building in Washington, DC, seemed at the time suspicious to even the casual observer of government intrigue. The five burglars who were arrested had known ties to the government, including links to agencies involved with espionage and so-called 'dirty tricks'. So it is not surprising that before too long, those links were reaching up to the inner circles of the White House.
Throughout the early months of the Watergate investigation, President Nixon denied any involvement and resolutely proclaimed his ignorance about who directed the botched burglary. His regal pronouncements, which were designed to draw a safety net around the Oval Office, put into a difficult position the investigators who were alleging that the President was not an innocent bystander.
Their allegations subjected them to derision by many. After all, here was the President of the United States denying their charges, using the integrity of his position to proclaim his innocence. So how could these hot-shot investigators of the burglary and its aftermath question Mr. Nixon's honesty? And where was the proof to support beyond any reasonable doubt, their incredible allegations of the President's complicity in the burglary?
For a time, Nixon managed to divert the truth. Nevertheless, the doubts not only persisted, they grew as the evidence mounted. Unfortunately for the investigators, the evidence was essentially circumstantial, so they were in a predicament. They intuitively knew that they were on to something, but they kept coming up short. If they only had a 'smoking gun' they lamented, they could prove not only Nixon's complicity in the planning of the burglary, but also that he was lying in an attempt to cover up the truth. Ever since, the term smoking gun has come to symbolize the all important piece of evidence that was needed to prove to the American people that someone in the government was lying to them.
The investigators hot on Nixon's tail eventually got their wish. The audio tapes of Nixon's conversations in the Oval Office were finally discovered, and they proved to be the smoking gun that unseated Nixon. Another example of a smoking gun was Monica Lewinsky's now infamous blue dress, which proved that President Clinton had lied to the American people. Given my recognition of the magnitude of these events, I do not use the term smoking gun lightly. But I have uncovered a smoking gun that proves beyond any reasonable doubt that the government is lying to us again.
I have been contending for some time, as have a growing chorus of other people, that the Gold market is being manipulated and that in all probability based on the circumstantial evidence available to date, the US government is directing this manipulation. I have now uncovered from public records indisputable evidence that substantiates these allegations, which thereby proves that the repeated, blatant government denials of any involvement in the Gold market are patently false. In short, I have found a smoking gun. Some background information will put this new evidence into perspective.
Readers of these letters over the past few years are no doubt aware that I have been looking for a smoking gun. These investigations began not too long after Gold broke below $380 in November 1996. That event was important to me, and I remember very well mentioning to a friend at the time that 'it shouldn't have happened'. I meant that Gold was telling us something important, namely, that for reasons that were not yet clear to me, Gold was headed lower notwithstanding the fundamental and technical factors that were suggesting a positive outlook for the Gold price.
By early 1997, I sensed that we faced something that could not be explained by normal market forces. For example, in an article purposefully entitled "'Managing' Markets" in Letter No. 203 dated April 21, 1997, I wrote about the peculiar events that had just occurred only a few days before on April 11th, after a much higher than expected inflation number was released at the open of that day's trading. After describing the action in the Gold and T-Bond markets, and to explain what had happened when prices reversed sharply in an unusual and abrupt change of trend, I said: "It appeared that some powerful force had entered the market."
I went on to suggest that this force was intervention by the US government, but my conclusion was based on evidence that was totally circumstantial. So I continued my investigations, waiting for the all important solid proof to appear that the government was indeed manipulating the Gold price.
Interestingly, while few questioned whether the government did intervene to manipulate the T-Bond price that day, almost no one accepted the notion that the government acted to manipulate the Gold price. I found these divergent views perplexing.
Given what happened in the market that fateful day, it was inexplicable to me that most everyone back then was willing to acknowledge the government could intervene in the T-Bond market, but not in the Gold market. Nevertheless I accepted this divergent and to my mind, peculiar thinking because the government had never formally acknowledged, at least since the 1970's anyway, that it was intervening in the Gold market. I came to the realization that without that acknowledgment, or unless clear evidence of government intervention could be provided in the absence of any government acknowledgment, participants would greet claims of government intervention in the Gold market skeptically, with one exception.
Those intimately involved with and experienced in the Gold market who were willing to open their minds to view the mounting - albeit circumstantial - evidence, accepted the idea of government intervention readily and willingly. But this limited group who believed there was government intervention in the Gold market was about to grow when another piece of evidence emerged the following year. This evidence caused more people to accept the explanation that the Gold price was weak because the US government was intervening in the Gold market.
In an article entitled "Grist for the Conspiracy Theorists" published in Letter No. 233 on October 26th, 1998, I commented on an important statement made by Alan Greenspan. Here is what I wrote:
"In testimony before the House Banking Committee on July 24th, Mr. Greenspan said: '_central banks stand ready to lease [i.e., lend] gold in increasing quantities should the price rise.' In short, central banks stand ready to use their hoard of Gold to keep its price from rising. Maybe the conspiracy theorists have found their smoking-gun."
Mr. Greenspan's statement received widespread attention, but in the end, it fell short of the definitive proof needed to establish government complicity to manipulate the Gold price. He did not name any specific central banks, so if his statement was taken within the context of his entire testimony, it could be interpreted as a theoretical comment about government potential, rather than actual deed.
Personally, I do not agree with this limited interpretation of this important remark, given the frank and honest disclosures that appear in the overall body of Mr. Greenspan's speeches and testimony while he has been Federal Reserve Chairman. In short, given the insightful views on Gold expressed by Mr. Greenspan on numerous occasions, as well as his perceptible fondness for the automaticity of monetary policy under the classical Gold Standard, I think he was telling us something from the 'inside', and doing it without breaching the constraints within which he must operate. Perhaps at the very least he was telling us that in the present circumstances, Gold could not reliably serve, as it has in the past, in its well proven role as an indicator of inflation. In any case, more proof was necessary.
To many that proof came in May 1999 with the peculiarly timed announcement by the Bank of England that it intended to dishoard one-half of its Gold reserve. Aside from the timing, the fact that the BoE announced the sale in advance seemed sure to guarantee the lowest possible price for their Gold, a result that would clearly not be in the best interests of the British people. So it seemed obvious their decision was driven by other reasons.
In an attempt to calm the firestorm provoked by their announcement, the BoE gave a spurious reason to justify their actions, namely, to give the Gold market "transparency". This reason was met by widespread derision, as everything else the Bank of England does regarding Gold has no transparency whatsoever. For example, the BoE flaunts generally accepted accounting principles by not distinguishing between nor properly reporting separate asset categories for Gold that it owns (essentially a cash item on the balance sheet) as opposed to Gold it has loaned (which is of course a receivable). Instead, the BoE reports these very different assets as one item.
Given that the Blair government only arrived on the scene in mid-1997, after the price manipulation in the Gold market had already begun, it was clear that the BoE was not the instigator of the Gold price manipulation. Mr. Blair's Treasury Minister, Gordon Brown, was just a small pawn in a big picture, and that as a consequence, the BoE was just doing a favor for someone else. Who had that kind of power over another country's central bank and Finance Ministry? The evidence continued to point to the US government. So I continued my research, which was now directed toward the US Gold Reserve stored in Ft. Knox, which formed an important part of the total US Reserve Assets.
As recorded in these letters, in August 1999 I wrote to Treasury Secretary Summers asking for various information about the Gold stock, including whether the Gold reserves were being audited. After receiving no response, I used the good offices of my Congressman, who was able to get a reply from Treasury officials, but curiously, not from Mr. Summers himself. Based on this correspondence and the reports that I received, I concluded in Letter No. 262 dated April 10, 2000 that: "It would appear that the Gold Reserve is properly stored in Fort Knox and the other storage vaults. It would appear that the Gold Reserve is being properly accounted for and audited."
Note my purposeful use of the word appear. After all, I hadn't personally visited the vaults and counted the bars, so I was only drawing and properly stating a conclusion based upon indirect evidence, namely, the correspondence and reports that I received. And given Nixon's and Clinton's lies, can we really trust government not to lie about something as important as the Gold reserve, particularly if they were, as I increasingly suspected, surreptitiously intervening in the Gold market?
Also, in the back of my mind was the curious fact that Secretary Summers did not write to my Congressman. Instead, he had underlings respond, so I wondered about this conspicuous silence by Mr. Summers. Was the Treasury Department chain of command being relied upon (as Nixon had tried to rely upon the White House chain of command) for a reason? Was there something Summers knew about Gold that his underlings didn't? If so, they could write the letters to my Congressman and believe them to be truthful, while Summers knew otherwise. Was I being disinformed by the Treasury Department?
About this time, Bill Murphy and his colleagues at www.GATA.org, who had already been making tremendous strides in the Herculean task of exposing the US government's price manipulation in the Gold market, were also coming up with some startling information, particularly as it relates to the Exchange Stabilization Fund. The conclusion of some of the reports released by GATA made my skepticism about the absence of a reply from Secretary Summers seem warranted.
After all, the ESF is under the direct control of only two people, the Treasury Secretary and the President. Did Secretary Summer's knowledge of the goings-on in the secretive ESF explain why his underlings, and not him, were writing the letters denying US government involvement within the Gold market? Would he be fibbing if his letter denied any involvement by the US government in the manipulation of the Gold price because as one of two people responsible for the ESF he knew otherwise? Did he risk being caught if he did write an untruthful letter?
Despite the denials coming from lower level Treasury officials, some eye-opening facts were now emerging as a result of some brilliant investigating. See, for example, Reg Howe's April 9, 2000 report, The ESF and Gold: Past as Prologue?, at http://www.goldensextant.com/commentary10.html#anchor29922. These newly uncovered facts were starting to paint a picture at odds with the US government's pronouncements.
Reg's report reveals that unexplained losses were appearing in the ESF's quarterly reports to Congress in quarters when the Gold price rose, while profits were earned in quarters when the Gold price fell. This result was curious because there reportedly were no interventions in the foreign exchange markets at the time, and as Reg says, "there were no other obvious activities that might explain [these] losses". So how did these profits and losses arise if not from the Gold market? These financial results provided further circumstantial evidence that the ESF was short Gold, presumably because it was intervening in the Gold market, but indisputable evidence of ESF activity was still missing.
By way of background, the ESF was created subsequent to the 1933 Gold confiscation, and funded by the paper profits arising from 1934 devaluation of the Dollar against Gold, after which it took $35 instead of only $20.67 to purchase one ounce of Gold. The ESF was established under the exclusive control of the President and the Treasury Secretary. Being within the exclusive domain of the Executive Branch, it operates largely outside of Congressional oversight. Because of this inherent potential to operate as a loosely supervised slush fund, many prominent people have long recommended the ESF's dissolution.
The ESF is secretive, shrouded in mystery, and little is known about it. Even its financial statement tells us little. For example, the ESF balance sheet does not show any Gold asset. But this balance sheet is a fiction anyway, and here's why.
For the latest available ESF financial statement, please refer to http://www.fms.treas.gov/bulletin/b30esf.pdf. The largest asset on the balance sheet, $15.8 billion, is entitled Foreign Exchange and Securities, but footnote 2 to this asset says: "Excludes foreign exchange transactions for future and spot delivery." Think for a moment about the implications of this footnote.
If this asset excludes both future and spot delivery, ALL foreign exchange transactions are therefore excluded on the ESF's balance sheet. Therefore, the total losses from these transactions can easily be excluded as well, so long as the counter-party never asks for delivery, which the ESF can no doubt easily arrange. After all, who would question the creditworthiness of the US government and its ability to deliver on its foreign exchange commitments?
This footnote is important for another reason. It also makes possible Gold transactions in the ESF because it allows the possibility that they are not Gold transactions per se, but rather, as an unreported foreign exchange transaction. This sleight of hand is possible because Gold transactions are made against some national currency. So the ESF can misleadingly report these trades as a foreign exchange transaction and not a Gold transaction, but the ESF doesn't even need to provide this minimal reporting because all foreign exchange spot and forward transactions are excluded anyway.
In any case, given this background information and facts, and much more which I have not included for the sake of brevity, it should be clear why my skepticism about the government's denials of involvement in the Gold market has been building. But I, GATA, Bill Murphy, Reg Howe and others leading this charge, are not alone. Increasing numbers of people have come to doubt the honesty of government pronouncements claiming no involvement with the Gold market.
While the skepticism grows, so too has the search for hard evidence. And I have now found the elusive smoking gun.
I was doing some research and found irrefutable evidence from the US government's own public reports. The first report is posted at the following website of the Federal Reserve, http://www.bog.frb.fed.us/releases/Bulletin/1000pg51.pdf, and I refer to the August 2000 report.
This report prepared by the Federal Reserve shows the US Reserve Assets, and it specifically reports the Gold Stock. Of interest is the description on this entry. It says "Gold stock, including Exchange Stabilization Fund". The $11,089 million Gold Stock in this report on December 31, 1999 is revealing for two reasons.
First, it reports a $40 million increase from the November 1999 balance. Because this asset is booked at the archaic $42.22 ounce price, this $40 million increase represents approximately a 950,000 ounce jump from November 30, 1999. Note that this asset then declines by $41 million on January 31, 2000.
Second, to appreciate the importance of the movement in this asset, the US Gold reserve in the above report needs to be compared to the weight of Gold on December 31, 1999 on the Federal Reserve's balance sheet. The following URL shows the Fed's December 31, 1999 annual report. http://www.federalreserve.gov/boarddocs/RptCongress/annual99/ann99.pdf
Note that the Federal Reserve's December 31, 1999 balance sheet shows a Gold Stock of only $11,048 million (see page no. 334), which is $41 million LESS THAN the $11,089 million reported as the total US Reserve Assets. Again, at the $42.22 per ounce price at which the asset is booked, approximately 1 million ounces of Gold is involved.
The important point is that there is Gold in the US Reserve Assets report (for which its footnote says includes the ESF) that is not on the Federal Reserve's balance sheet. So there is only one possible answer to this discrepancy. This 1 million ounces of Gold must be a Gold transaction that was undertaken by the ESF. There is no other plausible alternative.
As already noted, there are letters coming to GATA and others from the Treasury Department saying that there is no intervention in the Gold market by the ESF. So is the Treasury Department lying? Yes, the letters from Treasury are not truthful because this approximately 1 million ounce year-end 1999 entry in the US Reserve Assets must be an ESF intervention in the Gold market. There is no other explanation.
First of all, any transaction of this size by any government entity by definition has to be an intervention. It's too large a transaction to be anything else, given the fact that Gold is no longer used by governments in settling accounts. Second, because the Gold is not included in the audited accounts of the Federal Reserve, it is Gold under the control of the ESF.
These two public reports of the ESF and the Federal Reserve are the smoking gun. Despite the Treasury Department denials, the ESF is indeed intervening in the Gold market. The comparison of the report of the US Reserve Assets to that of the Federal Reserve proves it. But as spectacular as this discovery is, there is even more startling and revealing news.
The following table shows: (1) the Gold Stock reported on the Fed's year-end audited balance sheet, (2) the Gold Stock in the US Reserve Assets as reported by the Fed, and (3) the difference between these two totals in Dollars and ounces.
