Reprinted with Permission
Judicial Holding Pattern: Giving the Defendants Plenty of Rope
The clerk's office has advised me that the court is unlikely
to hold a hearing on the defendants' motions to dismiss until
fall. Although possible, it is also unlikely that the court will
rule on these motions without first holding a hearing. Nor does
it appear that the Bush team has any interest in trying to distance
itself from the scheme to manipulate gold prices put in place
by the Clinton administration. On the contrary, the new crowd
in Washington seems just as determined as their predecessors
to fight gold by any means available, fair or foul.
Price-Sensitive Outflows of Foreign Earmarked Gold Stabilize
at 40 Tonnes/Month. Month-end balances of total foreign earmarked
gold held by the Fed are reported in table 3.13 of the Federal
Reserve Bulletin. (Selected articles from these bulletins
are available online at http://www.federalreserve.gov/pubs/bulletin/default.htm;
the monthly 3.13 tables can be found at http://www.federalreserve.gov/releases/Bulletin/.)
In discussing gold leasing by foreign central banks, paragraph
40 of the Complaint observes
that from January 1995 through December 1999, foreign earmarked
gold held at the Fed decreased by almost 1550 metric tonnes.
What is more, during this period surges in outflows coincided
with strong gold prices, apparently confirming that central banks
were indeed leasing or selling gold to control its price. This
pattern is shown graphically in two prior commentaries, The
Fed: Up to its Earmarks in Gold Price Manipulation? and Central Banks vs. Gold:
Winning Battles but Losing the War? The chart in the latter
commentary carries the monthly figures on foreign earmarked gold
in table 3.13 through March 2000. The figures since then are
shown in the table below, which suggests that the central banks
have not only increased their leasing and sales activities but
also made them less obviously targeted to price increases.
Earmarked Gold Decrease from Prior Month
($mil.@42.22/oz.) ($mil.) (tonnes)
April 2000 9711 0 0
May 2000 9711 0 0
June 2000 9688 23 17
July 2000 9688 0 0
August 2000 9674 14 10
September 2000 9620 54 40
October 2000 9565 55 41
November 2000 9505 60 44
December 2000 9451 54 40
January 2001 9397 54 40
February 2001 9343 54 40
March 2001 9289 54 40
April 2001(p) 9235 54 40
As is readily apparent from the foregoing table, starting
in September 2000 monthly outflows of foreign earmarked gold
stabilized at around 40 tonnes/month, a rate that seems to have
been set in concrete since last December. While outflows no longer
move in tandem with gold prices, the new constant rate of outflow
represents a substantial increase over the past three years.
For calendar 1998, total outflows amounted to 309 tonnes; for
1999, 302 tonnes; and for 2000, 355 tonnes. Annualized, the steady
rate of outflow since last September approaches 500 tonnes, which
is 100 tonnes more than the the total annual central bank gold
sales authorized under the Washington Agreement.
Although table 3.13 does not provide any indication of the
specific central banks or international organizations responsible
for these outflows, their size limits the possibilities. They
almost have to be coming from one or a very few large holders.
Three obvious possibilities are: (1) the International Monetary
Fund, perhaps moving gold through the BIS as suggested in paragraph
41 of the Complaint; (2) a coordinated scheme organized through
the BIS, possibly involving gold swaps with the United States;
or (3) draw downs by Switzerland in connection with its program
of official gold sales.
Fed Stops Reporting Gold Held by ESF. Paragraphs 62-64
of the Complaint identify
instances of month-end discrepancies from 1974 through January
2000 between the Fed's gold certificate account, which by law
must include certificates for all gold held by the Treasury,
and the total U.S. gold stock, including gold held by the Exchange
Stabilization Fund, as reported in tables 1.18 and 3.12, respectively,
of the Federal Reserve Bulletin. By definition, these
discrepancies reflect positive or negative month-end gold balances
at the ESF, and thus necessarily imply corresponding gold trading
activities by the ESF. (The monthly 3.12 tables can be found
with the 3.13 tables at http://www.federalreserve.gov/releases/Bulletin/.
The monthly 1.18 tables are not available online; weekly figures
on the Fed's gold certificate account are included in Release
H.4.1, Factors Affecting Reserve Balances, available at http://www.federalreserve.gov/releases/H41,
but this series does not contain month-end data.)
Table
3.12 "as corrected" in the February 2001 Federal Reserve
Bulletin removed the four surviving discrepancies
between it and table 1.18. These included adjustments to the
figures for June 2000 and year-end 1997, 1998 and 1999. But the
critical change was not to the figures themselves but to the
relevant line item describing them. "Gold stock, including
Exchange Stabilization Fund" as reported in prior issues
was replaced by "Gold stock" without any reference
to the ESF. In other words, the figures could not be changed
without a change in description, proof that the earlier discrepancies
were indeed on account of gold held by the ESF. Among the corrections
made in February 2001 was the elimination of approximately $41
million of gold (approximately 30 metric tonnes @ $42.22/oz.)
acquired by the ESF in December 1999, possibly reflecting its
activities in response to the Washington Agreement.
Treasury Adjusts ESF's FY 2000 First Quarter Trading Results.
Building on the discrepancies between the Fed's gold certificate
account and table 3.12 including the ESF, paragraphs 65 and 66
of the Complaint allege
that the ESF's poor trading results from 1997 through March 2000
were most likely due to its efforts to manipulate gold prices.
During this period not only did the ESF deny making any interventions
in the foreign exchange markets, but also its trading profits
seemed to be associated with periods of weakness in gold prices
and losses with gold price strength. Summary financial statements
for the ESF are included the quarterly U.S. Treasury Bulletins,
available online at http://www.fms.treas.gov/bulletin/index.html.
Table ESF-2 gives the ESF's profits or losses (-) on foreign
exchange, which is the line item that historically also included
gold.
According to table ESF-2 in the June
2000 U.S Treasury Bulletin, the ESF incurred a loss on foreign
exchange of $1,627,763,000 -- its third largest quarterly trading
loss ever -- in the last calendar quarter of 1999 (first quarter
of FY 2000). As the Complaint points out, given the sharp rally
in gold prices following the Washington Agreement, these losses
fit the pattern.
Somewhat oddly, and contrary to the practice in other years,
the ESF-2 for the first fiscal quarter of FY 2000 also included
a column entitled "Fiscal year to date, Oct. 1, 1998, through
Dec. 31, 1999," which indicated a cumulative profit over
these five quarters (which do not constitute a fiscal year) of
$10,634,000. In the prior ESF-2, the ESF had reported a total
profit for FY 1999 of $1,637,397,000, so that at first glance
these cumulative figures -- however unusual their inclusion --
appear consistent with prior reports.
However, subtracting the reported FY 2000 first quarter loss
from the total FY 1999 profit yields $9,634,000 rather than $10,634,000.
Still, this $1,000,000 error hardly suggests that the columns
in the ESF-2 for the first quarter of FY 2000 were erroneously
transposed, with the cumulative figures for five quarters actually
representing the results for the current quarter. Indeed, if
the $10,634,000 were in fact profit for the first quarter of
FY 2000, then the cumulative figure for the five quarters beginning
October 1998 should have been $1,648,031,000, not a negative
$1,627,763,000.
Nevertheless, without any explanation for the apparently egregiously
incorrect ESF-2 for first quarter of FY 2000, subsequent ESF-2
reports for FY 2000 treat the $10,634,000 figure as profit for
the first quarter. The ESF-2 reports for the second through fourth
quarters of FY 2000 show quarterly and cumulative FY 2000 trading
losses as follows: second quarter, current loss - $393,760,000,
cumulative - $383,126,000; third quarter, current loss - $313,376,000,
cumulative - $696,502,000; fourth quarter, current loss - $647,089,000,
cumulative - $1,343,591,000. Thus by the end of FY 2000, the
cumulative loss had grown to pretty near that originally reported
for the first quarter.
The June
2001 U.S Treasury Bulletin contains the ESF-2 for
the first quarter of FY 2001. It shows a foreign exchange trading
loss of $57,589,000 for both the current quarter and the fiscal
year to date. Why this practice was not followed in FY 2000 remains
a mystery, as does the negative $1,627,763,000 amount reported
in the ESF-2 for the first quarter of FY 2000. One possible explanation,
particularly in light of the 30 tonnes of gold that suddenly
surfaced at the ESF in December 1999, is that halting and reversing
the gold price explosion precipitated by the Washington Agreement
so overwhelmed the accounting resources of the ESF that it caused
a bunch of reporting snafus.
A less forgiving explanation is that the ESF has purposefully
tried to camouflage a large trading loss in the first quarter
of FY 2000 by spreading it over subsequent quarters. In that
event, the plan would have had to be conceived prior to the filing
of the Complaint. It is not an impossible scenario.
I first pointed to a possible relationship between the ESF's
trading losses and gold prices in an April 9, 2000, commenatary,
The ESF and Gold: Past
as Prologue? This commentary was not only included in GATA's
Gold Derivatives Banking Crisis,
but also actively discussed during GATA's May 10, 2000, presentations
to the Speaker of the House and later to other government officials.
They included one with close ties to the Treasury. He pointedly
challenged the notion of any ESF involvement in the gold market.
The ESF's originally reported $1.627 billion FY 2000 first quarter
loss was also a subject of highlighted discussion in my commentary
published July 11, 2000, "Ah!
tenez, vous êtes de la merde dans un bas de soie."
Treasury Places Gold Reserves in "Deep Storage."
My Consolidated
Opposition to the various motions to dismiss, especially
part 4 of the Statement of Facts (viz., Gold
Swaps by the ESF), as supported by paragraphs 29 and 31-33
of my Affidavit,
sets forth certain facts discovered after the filing of the Complaint
relating to gold swaps by the ESF and the reclassification of
U.S. gold reserves stored in the U.S. Mint's facility at West
Point, N.Y.
The Financial Management Service in the Treasury issues a
monthly Status Report of U.S. Treasury Owned Gold. (These reports
are available online at http://www.fms.treas.gov/gold/.)
The report for September 30, 2000, reclassified approximately
54 million ounces (1683 metric tonnes) stored in the Mint at
West Point from "Gold Bullion Reserve" to "Custodial
Gold Bullion" but made no similar change for almost 44 million
ounces stored at the Mint in Denver. Gold at Fort Knox was classified
only by location in both the August and September reports.
The reports for October 2000 through April 2001 remained unchanged
from the September 2000 report. However, the following legend
appears at the end of March and April 2001 reports: "Note:
The information in this report has not changed since September
2000 due to changes in the U.S. Mint's reporting. For questions,
contact Public Affairs at (202) 354-7222." So far as I am
aware, no one at the Treasury has answered any questions regarding
what prompted the September reclassification of the gold at West
Point to "custodial" status, or more specifically,
whether this changed status indicated that the gold had been
committed to one or more swap transactions.
On July 2, 2001, the FMS posted the report for May 2001 (http://www.fms.treas.gov/gold/01-05.html),
which contained a revised format. Under "Mint Held Gold"
appears a completely new category called "Deep Storage"
followed by entries for Denver, Fort Knox and West Point and
a "Subtotal - Deep Storage Gold" for over 245 million
ounces stored in these three facilities. A note at the end of
the report reads: "Deep Storage Gold - formerly called Gold
Bullion Reserve or Custodial Gold Bullion Reserve. [sic]
This gold is owned by the U.S. Government and held for safekeeping
by the U.S. Mint at the locations listed."
This creatively named "Deep Storage Gold" accounts
for almost 94% of the total U.S. gold stock (approximately 262
million ounces or 8150 metric tonnes), which has not been audited
by other than government employees since the Eisenhower administration.
As a consequence, there is no hard evidence to refute seemingly
bizarre stories that surface from to time regarding the nation's
gold reserves, such as large secret sales by President Johnson
to fund the Vietnam War. Now another equally imaginative tale
is developing online. It suggests that "Deep Storage Gold"
is a euphemism for gold ore, and that some or all of the gold
stock has been loaned or swapped against forward contracts by
certain gold mining companies, e.g., Barrick and AngloGold.
The FMS's new reporting format also contains an introductory
summary with only two line items: "Gold Bullion" in
the amount of 258.6 million ounces; and "Gold coins, Blanks,
Miscellaneous" accounting for the remainder of the total.
So presumably "Deep Storage Gold" is not a reference
to ore. Gold held in the vault at the N.Y. Fed or on display
at Federal Reserve banks is also classified as "Gold Bullion."
Why that more conventional nomenclature is no longer appropriate
for U.S. gold reserves held at the Mint remains unclear.
What is clear is that government officials do not possess
a reputation for integrity sufficient to obviate the need for
periodic verification of the U.S. gold stock by independent outside
auditors. However deeply stored, a full and complete audit of
the nation's gold reserves by other than government employees
is long overdue.
Secretary O'Neill: Straight-Shooter or Dissembler? On
April 20, 2001, James Turk published an article, Behind
Closed Doors (also available from http://groups.yahoo.com/group/gata
as message
734 and message
735), speculating on a possible link between gold swaps by
the ESF, perhaps with the German Bundesbank, and reclassification
of gold bullion stored at West Point. This article apparently
came to the attention of Congressman Ron Paul, who on May 22,
2001, engaged in the following exchange with Treasury Secretary
Paul O'Neill at a hearing of the House Financial Services Committee
on "The State of the International Financial System"
(see http://www.house.gov/financialservices/052201w2.htm):
Dr. PAUL: 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?
Secretary 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
[emphasis supplied].
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.
The 1995 circumstance I don't know. 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,
and 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.
Dr. PAUL: If I could follow up on this, thank you very much.
A lot could be said about Secretary O'Neill's response to
Congressman Paul. For the present, I will confine myself to the
following observations.
Unlike Treasury officials working under former secretary Lawrence
Summers, Secretary O'Neill does not attempt to distance the ESF
from any possible activity in the gold market. Rather, the italicized
sentence at the end of his first paragraph adopts language very
similar to that used by the Fed's general counsel, J. Virgil
Mattingly, in his 1995 statement to the Federal Open Market Committee
disclosing the ESF's use of gold swaps (www.federalreserve.gov/fomc/transcripts/1995/950201Meeting.pdf).
It's pretty clear that these ESF operations are authorized.
I don't think there is a legal problem in terms of the authority.
The statute [31 U.S.C. s. 5302] is very broadly worded in terms
of words like ‘credit' -- it has covered things like
the gold swaps -- and it confers broad authority. [Emphasis
supplied.]
Secretary O'Neill's disclaimer of any knowledge of this "1995
circumstance" is not wholly persuasive. On May 25, 2001,
three days after he delivered this testimony, the Department
of Justice, with assistance from lawyers at the Treasury, filed
a reply memorandum
on behalf of Secretary O'Neill. Footnote 2 states:
The Secretary reiterates that the ESF has not since 1978 dealt
in gold, including "gold swaps." In the event the Court
denies any part of the Secretary's motion to dismiss, the Secretary
intends to promptly file a motion for summary judgment, supported
by sworn affidavits, demonstrating that the factual speculation
upon which Howe's claims are premised is incorrect.
On the same day, with assistance from lawyers at the Fed,
the DOJ also filed a reply
memorandum for Alan Greenspan. So it was perhaps not "just
by coincidence" that on the morning of Secretary O'Neill's
testimony, he and the Fed chairman were discussing gold. Indeed,
it is quite reasonable to suppose that they were in truth conferring
about the reply memoranda soon to be filed on their behalf, and
specifically how to handle the problem of the 1995 Mattingly
disclosure as well as the FMS's September 2000 reclassification
of the gold reserves at West Point.
For the record, at the London P.M. fix of $284 on the morning
of their discussion, the claimed U.S. gold stock of 262 million
ounces had a market value of $74 billion. A gold price over $305
is required to bring this amount up to Mr. Greenspan's $80 billion.
Of course, as Secretary O'Neill noted, he did not validate this
figure. Nor did he state the amount of the U.S. gold reserves
in ounces or tonnes.
Secretary O'Neill also seems to confirm that the ESF's only
intervention in the currency markets during FY 2000 was the coordinated
and publicly announced G-3 intervention to support the euro on
September 22, 2000, in advance of the G-7 finance ministers meeting
in Prague. His reference to the yen in this connection may be
an inadvertent error, or may indicate that the ESF used its yen
reserves rather than dollars to buy euros. In any event, he says
nothing to explain how this "one...fairly small transaction"
produced significant trading losses at the ESF in the two quarters
preceding it, or why it caused such a large loss in fourth.
Nor is it likely that Mr. O'Neill, when he arrived as CEO
at Alcoa, would have let pass without notice a recent quarterly
financial statement erroneously reporting a loss in lieu of an
actual profit. And had he done so, he surely would have received
sharp questions from his board or his shareholders. Cabinet secretaries
and their overseers in Congress may operate by different rules
than corporate executives and directors, but the shareholders
of the United States are the American people. They deserve, should
demand, and have every right to the truth about the ESF and the
nation's gold policies, including a full independent audit of
the U.S. gold stock by a major accounting firm.
Reg Howe
row@ix.netcom.com
http://www.goldensextant.com
July 23, 2001
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