However, the gold holdings of the U.S. have not been audited in more than 50 years. One reason given for the lack of an audit is that it would be "too expensive" to conduct one. An audit would cost a few million dollars, at most, so using cost as a reason for not performing it strains belief when placed in the context of the country's Fiscal Year 2009 deficit of $2,000,000,000,000.00+, and federal debt of $11,600,000,000,000.00+. It is curious that one of the few places within the government where costs appear to be of concern relates to an audit of the one, true monetary asset possessed by the American people.

Even the Treasury Department's clandestine $50 billion Exchange Stabilization Fund (ESF), which is only one-fifth the value of America's reported gold holdings, undergoes an annual audit. For fiscal year 2008, this audit was conducted by KPMG, a well-known, independent CPA firm. KPMG's 2008 ESF audit uncovered "significant deficiencies," "material weaknesses," a "weak control environment," and "several control deficiencies." If a Treasury organization subject to annual audits could fail its recent exam as broadly as that, what are we to assume about the safety and security of the people's gold supply, which, like the national money geyser, the Federal Reserve Bank is never audited? And if the ESF is audited each year, what legitimate rationale can there be for not auditing the nation's gold supply? Something isn't adding up. In such a situation, inferential analysis can provide value, which you will see as this article progresses.

The financial events of the past year demonstrate beyond any reasonable doubt that the United States government is now of Wall Street, by Wall Street and for Wall Street, in general, and of, by and for Goldman Sachs, in particular. This inversion of power and privilege was partly brought about by an explosion in government debt. The government relies on Wall Street to roll over existing and sell new debt issues. Debt is now hitting the market like a tidal wave, given the country's record-shattering deficits and costly Wall Street bailouts. If the paper cannot be sold at expected interest rates, then the debt-addicted system will go into seizure.

The radical empowerment and enrichment of Wall Street has transformed our democracy into an aristocracy, making the debt dealers the nation's new royalty, the government its feudal barons, and the citizens mere serfs who endlessly sweat and toil in fields of debt weeds that grow so fast they can never, ever be harvested.

Predictably, in such an aristocracy, an iron curtain of secrecy and non-transparency has descended across the land, separating Wall Street and government on one side, and the people on the other. While the people are deluged with generally useless government data that numbs their minds (as an example, a recent search of the Federal Reserve web site for "United States government 2008 financial statement" produced an unmanageable avalanche of 520,817 entries), simple, truly important information, such as audited gold reserve statistics, accurate monetary aggregates like M3, the names of taxpayer-funded TARP, TALF and other bailout recipients, and audited Federal Reserve Bank financials, is kept a state secret, using the hackneyed excuse that "it's for the people's good." Autocracies have always tried to convince the masses that ignorance is freedom, and that knowledge is enslavement.

The colossal conflict of interest that has developed between government -Wall Street axis, which hides behind the iron curtain of secrecy, and the citizens who stand in front of it now requires the people to-second guess everything they are told, for their own protection. The financial interests of a government controlled by avaricious, bonus-focused financiers are directly opposed to those of the people, since government revenues come directly from the people. What the government gains, the people lose, in the zero sum game of government finance. Which brings us to a more detailed examination of the people's gold.

For the past 28.5 years, from 1980 through June, 2009, the United States government's gold holdings have been reported as being essentially constant, at around 262 million ounces. Gold hit a nominal price high of $850.00 per ounce in January, 1980, when a severe recession was developing. (Compared to today, 1980 looks like the bubbliest part of the Roaring 1920s.) Inflation-adjusted (using government CPI figures, which are hotly debated), that price would now exceed $2,400 per ounce, whereas the current market price is only $950.00 per ounce. As GATA (www.gata.org) has demonstrated beyond any doubt, U.S. Treasury and Federal Reserve officials actively monitor and seek to suppress the gold price, because a rising price can signal fiscal, economic and/or fiat currency distress, things that are bad for markets and embarrassing for governments. (GATA's work in this area has been nothing short of heroic, and is well worth examining in detail.) For gold to be selling today at only 40% of its 1980 inflation-adjusted price, in the midst of the worst financial crisis in the nation's history, is curious.

While the United States gold supply is said to be constant, the holdings of many other nations, with the general exception of export-rich Asian countries, has declined, oftentimes radically. According to the World Gold Council, Canada's gold reserves are down 99.5% from 1980 to today; Australia's are down 68%; Austria's are down 57%; Belgium's are down 79%; The Netherlands' are down 55%; Portugal's are down 45%; Spain's are down 38%; Norway's are down 100%; Sweden's are down 30%; the United Kingdom's are down 47%; South Africa's are down 67%; Argentina's are down 60%; Mexico's are down 92%; Brazil's are down 41%; and the European Central Bank's are down 33% (since 1999, its first reporting year). Even Switzerland, a country with a long-term affinity for gold, has slashed its reserves by 60%. Official world gold holdings (held by all nations plus international financial organizations such as the BIS, the IMF and the ECB) are down 17%, despite large gold reserve increases by countries such as China, Taiwan, India and Russia that moderated the larger percentage declines in the many nations noted above.

However, the United States' gold holdings are said to be down a mere 1% during this 28.5 year period, even though the country's debt has surged from $712 billion to $11.6 trillion and its unfunded contingent liabilities have exploded to more than $90,000,000,000,000.00. So while other countries with far less debt and far better balance sheets slashed their gold holdings to raise money for various government purposes, the United States, with its surging debt and staggering deficits did not. Inconsistencies like this are worth exploring; sometimes they represent golden opportunities.

If the United States were a corporation or an individual, it would be considered completely non-credit worthy given its disastrous finances. The U.S.A. would not qualify for an Exxon credit card, let alone for the trillions of dollars it is borrowing in the global bond market. One way those in financial distress can obtain credit is to post bona fide collateral. Some consider a country's future tax receipts to be a form of collateral, but in the case of the United States, this is not so, because according to the Congressional Budget Office, the country will run multi-hundred billion dollar annual deficits for the next 70 years and beyond. So according to the CBO, the nation's future tax revenues are already spent. Hypothetically, the nation could sell its national parks, or its mineral and/or energy rights, but this would be a radical, last ditch solution that has not even been publicly debated. For all practical purposes, the country's only true collateral is the gold in Fort Knox and related depositories.

Those who are lending the United States money, by buying its Treasuries and other debt instruments, must be competent capitalists. If they have billions to lend, they obviously know how to earn and manage money. These lenders simply cannot be oblivious to America's financial situation, and must certainly understand the concept of collateral.

As of July 17, 2009, the nation's top few bullion banks were short 19.5 million ounces of gold on the futures exchanges. This highly concentrated short position was reportedly held by 4 or fewer major money-center banks. At a gold price that day of roughly $940.00 / ounce, the dollar value of this short position was $1,833,000,000.00, or $1.83 billion. A mere $10.00 / ounce decline in the price of gold would give the banks a profit of $195,000,000.00. A price increase of the same amount would produce a loss of $195,000,000.00, in other words, serious money in either direction. Given the financial crisis and the myriad problems affecting the banks, such as toxic derivatives and non-performing loans, why they would risk $1.8 billion on naked gold shorts in the world's most volatile financial casino, the commodities and precious metals futures market, is difficult to understand, unless they know things or have other advantages that the rest of the marketplace does not.

In inferential analysis, we look at what might appear to be unrelated facts to see if, in reality, there might be connecting strands among them. These connections help explain situations that otherwise defy logic. Even though isolated facts might be mute and uninteresting, they often tell an important story when combined. Sometimes, conjoined facts sing like canaries. We believe events in the gold market are trying to tell a tale, and we posit three general scenarios relating to the nation's gold reserves: Fort Knox, Fort Hocks and Fort Shocks.

FORT KNOX. In this scenario, the citizens of the United States own the exact amount of gold that is reported by the Treasury Department and the Federal Reserve: 261.5 million ounces. The gold supply is owned free and clear by the United States and its citizens. It is not swapped, hypothecated, pledged, exchanged, leased, sold, claimed, conditionally offered or in any other way compromised with respect to ownership. A full audit of the gold would prove that it exists strictly in bullion form (with no "paper bullion" or third party warehouse receipts) in the stated depositories. Based on recent fiscal, financial, monetary and economic developments, we view this scenario as possible, but extremely unlikely.

FORT HOCKS: In this scenario, an audit will show that a significant portion of the citizens' gold has been mobilized by the Treasury and / or the Federal Reserve; in other words, that it has been hocked at the global financial system's pawn shop. There are many possible means by which this could have happened; we list only a few.

1. The gold backstops favored bullion banks' trading activities: In this scenario, the government has contracted with a small number of favored bullion banks to have them manipulate the gold price so it remains within federal targets. They would achieve this by large-scale shorting and related market-intervention techniques. This helps explain why a small number of major NYC money center banks are currently short 19.5 million ounces of gold, which would otherwise be a reckless, irresponsible gamble with shareholder assets, and a possible violation of the banks' fiduciary duty, particularly in the current financial crisis. The banks have been guaranteed that if an exogenous event increases the gold price, their short positions will be "backstopped" by U.S. gold reserves. In other words, if a major bank failure, terrorist event, natural catastrophe, war or other major domestic or international event drives the gold price higher, exposing the banks to trading losses on their shorts, then the government will supply them with the bullion needed to close out their positions and cancel their losses. This is entirely consistent with the recent bailouts, where the government has purchased the banks' toxic assets with taxpayer money, sterilizing their losses at citizen expense.
   
   This scenario creates a money machine for the bullion banks. They can short gold with a government guarantee against losses, and can cover at lower prices, after they have driven the longs out of their positions. Operating like this, they can profit on up and down price moves, since they will create them. As noted above, the profits generated from these types of "bear raids" and subsequent "bull covers" can be enormous. ($195,000,000.00 for every $10.00 price decline given the bullion banks' current short position.) The banks can launch these raids repeatedly at virtually no risk, since dumping large amounts of gold onto the futures market creates predictable price declines. However, if the government needs to backstop the banks (due to trades gone wrong that are backstopped and insured), then the gold must come from the United States' gold reserve. There have been hundreds of $10.00 and dozens of $50 - 100.00+ price declines during the current bull market, indicating that the bullion banks have potentially made tens of billions of dollars' worth of profits, given that they have consistently been short the gold market during these price episodes. If they have not been profiting from these short positions, why would they have continued to hold them for years, and continue to hold them today? One further point: since futures represent a zero-sum game, where every profit means an identical loss for another party, any bank gains have come at the direct expense of other investors who have been losing in a rigged, corrupt casino that is riddled with fraud.



2. Leasing for profit: In this scenario, the government has leased all or a portion of the nation's gold to earn interest on its value, or simply to mobilize the gold as a way for bullion banks to keep the price within targets. However, in this case there is no government "backstop" or guarantee if the bullion banks' shorts go bad; the banks are responsible for their own trades. In this case, the government assumes counterparty risk, because if the bullion banks' naked shorting operations produce losses, then the banks may be unable to return the borrowed gold to the government. This is a Las Vegas gamble on the part of the bullion banks and the government. However, if the government is willing to lend large quantities of gold to the bullion banks, this will give the banks enormous leverage in the marketplace, and the ability to drive down the price of gold, thereby generating significant profits at the longs' expense. The banks are fully exposed to the risk that exogenous events could increase the price of gold, creating losses on their short positions. However, if the gold price does increase, the banks might be able to "double down" by borrowing additional bullion from the government, in an ongoing effort to crush the price. With potentially tens of millions ounces at their disposal from the United States, plus additional gold possibly available from other central banks, producers and operators of the new Exchange Traded Funds, the shorts could cause serious price damage, though they would have to take risks to win. As in scenario #1 above, the profits from such trading operations are potentially huge. Leasing has existed in the market for years, with gold supplied by central banks and miners. Much of this hedging activity has been curtailed with respect to miners, but due to the culture of secrecy and non-transparency at central banks, their exact activities are an unreported state secret and a mystery. Recent government rhetoric about transparency has clearly been disingenuous.



3. The government is actively trading gold. In this scenario, the government is trading gold on the futures exchanges, for profit and to control the price, either directly (under a secret trading name) or indirectly (using proxies), and either on-shore or offshore. This activity could be conducted by the Working Group on Financial Markets or some other government-funded financial entity. Any trading losses could be settled by delivering to the exchange(s) gold from the United States' official reserve.

FORT SHOCKS: In this general scenario, and audit would reveal that America's gold is gone, either in whole, or in part. It might have been sold outright, pledged to counterparties, or otherwise distributed. The belief that there are millions of ounces of gold in Ft. Knox would therefore be a great American delusion. America's gold could have been sold or exchanged in several ways. Here are a few:

1. Foreign purchasers of U.S. Treasury and/or Agency debt simultaneously demanded the right to purchase U.S. gold, to offset currency and other risks associated with the debt. In this scenario, China, Japan and/or other governments demanded and won the right to purchase "x" ounces of United States gold for every "y" dollars of United States debt. This would compensate the debt purchasers for likely dollar devaluation given current fiscal deficits and fast-growing national indebtedness. This would also provide debt purchasers with some insurance against default, since default would most likely result in a rising gold price. Since the U.S. economy is now completely debt-based, maintaining an orderly debt market is the nation's top fiscal and financial priority. Selling national gold to keep the debt market functioning smoothly would be considered by authorities a small price to pay.



2. Backstopping guarantees were invoked. In this scenario, recent rallies in the gold market caught the bullion banks short, and enabled them to receive gold from the government as part of the backstopping guarantees they negotiated. This gold was used by the banks to settle their short positions and cover losses. This gold would be sold into the open market, and never returned to the official U.S. reserve.



3. Government sold gold to raise cash. Over the 50 year non-audit period, government needed money and did not want to issue additional debt at the time. Therefore, it sold gold into the market to raise funds, just as numerous other central banks have done in recent years.



4. Gold leases with a "cash settlement" option. In this case, the government leased gold to third parties, such as bullion banks, with a "cash settlement" option, as opposed to demanding that the gold be returned at the termination of the leases. For whatever reasons, the bullion banks exercised the cash settlement option, and did not return the borrowed gold. In this scenario, the gold would never be returned to the official U.S. reserve.



5. A portion of the gold supply has been stolen, or has otherwise disappeared. The Royal Mint of Canada announced in June, 2009 that 17,500 ounces of Mint gold had been lost or stolen. This disappearance was confirmed during an audit of the Mint by Deloitte & Touche, CPAs, under the direction of the Auditor General of Canada. (If Canada audits its gold, why doesn't the United States?) Regarding security, the Mint's web site states: "The rigour of our production standards is equalled by the stringency of our security protocols. The refinery is a restricted environment controlled by security personnel supported by state-of-the-art surveillance technology." If it could happen there, could it not happen here, particularly over a period of 50 years? This is exactly why you conduct audits.



6. All or a portion of the gold simply cannot be accounted for. In this scenario, the paper trail for the nation's gold fails, with errors, gaps and inconsistencies, and no one even begins to know how to re-create it. If gold is missing, no one knows when it went so or how to find it, since there are so many years (50) to account for. This would be similar to the $50+ billion in cash that is missing in Iraq. That money was stolen recently, and even so, no one can account for or find it.

Implications. If the Fort Knox scenario prevails, it is a non-event. Since there is no change in the nation's gold supply, the status quo is maintained.

If the Fort Hocks scenario prevails, then the government has orchestrated a market manipulation scandal that is equivalent in nature to Enron, Worldcom, Madoff and all the other frauds in the sordid panoply, but that dwarfs them in dollar value and sheer, outright dishonesty. The revelation that a first world government had deliberately engineered such a market manipulation, resulting in tens of billions of losses to honest investors, while simultaneously producing epic, illicit profits for favored inside traders would be a shock to all markets and investors. An insider trading scandal of such alarming, unprecedented proportions would constitute an inexcusable abuse of power, and represent fraud and corruption on a third world scale. It would not just damage the reputations of America's monetary institutions, it would destroy them.

If the Fort Shocks scenario prevails, it would have severe implications for the dollar, because it would demonstrate that the United States' financials are deliberately distorted for monetary and political reasons. Even though the dollar amount of this scandal ($262 billion) would be miniscule in comparison with the government's 2009 deficit ($2 trillion), debt ($11.6 trillion) and combined debt and unfunded contingent liabilities ($90 trillion), it might serve as a tipping point, where faith in America's finances and confidence in its government are lost. If America's gold reserve position is a lie, then what else has been distorted, and where, if anywhere, is the truth?

Keep in mind that the fiscal year, 2009 deficit is currently running at $5,479,000,000.00 per DAY. So even if the Fort Knox scenario prevails and the 261.5 million ounces of citizen gold are safe and accounted for, their dollar value is completely destroyed by only 47 days' worth of deficits. America's gold cannot protect it from the national wealth wipeout that intensifies each and every day.

The United States could put these concerns to rest simply by auditing the gold and publicly reporting the findings. And yet, despite repeated attempts by such organizations as GATA to get them to do that, they refuse. Why? Is it because Treasury and Federal Reserve officials know that the results would be explosive, and similar to what has been outlined in the Fort Hocks and Fort Shocks scenarios above?

If it becomes known that the United States has surreptitiously hocked or sold its citizens' gold, the price per ounce would most likely explode. Conceivably, gold would have its first $500 up day as people threw in the towel on other forms of "money" they could no longer understand or trust.

While inferential analysis is not used to prove a hypothesis (there are other forms of analysis that can offer proofs, when the facts exist to create them), it can be extremely useful in pointing to the truth when important facts about a situation are not available or revealed. Even though this report does not prove the hypothesis that the United States' gold position is compromised, perhaps radically, the risk/reward dynamics of this situation are so interesting that we believe it is worth paying attention to the opportunity they provide.

July 23, 2009

Stewart Dougherty is a specialist in inferential analysis, the practice of identifying patterns and trends in specific, contemporary events and then extrapolating their broader implications and likely effects upon the future. Dougherty was educated at Tufts University (B.A.), and Harvard Business School (M.B.A. and an academic Fellow). He can be reached at trident888@cs.com. He is not affiliated with or compensated by those he references or recommends. He does not offer investment or trading advice, and nothing in this article should be construed as such. The reader has permission to share or post this article provided that the content is not changed and the author is acknowledged. Copyright 2009 by Stewart Dougherty, with all rights reserved.