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A Critique of The FRB Study on Gold

August 23, 1999

To fully appreciate the occult meaning and especially the real purpose of the Federal Reserve Board's study on gold, we must put it into perspective and consider the identities of its authors. The seemingly innocuous title of the FRB's study is

"A Note on Government Gold Policies." *

FRB Agenda Regarding Gold

The FRB's 'agenda' regarding the "gold question" is quite clear. In little-noticed testimony before the House Banking Committee, Fed Chairman Greenspan spelled it out in no uncertain terms. Subject to questioning by the Committee about the possible and potential dangers of reckless use of derivatives in the oil market, Fed Chairman Greenspan tried to downplay the risk that "some derivative contracts might produce a squeeze on short sellers."

He explained that there was no danger that the supply of oil to fulfill derivative contracts could be restricted. Then, he added the BLOCKBUSTER reference to gold:

"Nor can private counterparts 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."

Mr. Greenspan said, "CENTRAL BANKS," …bankS, like in the plural. Without one iota of doubt he was referring to a collusion of Central Banks acting in concert with the specific objective of CONTROLLING THE PRICE OF GOLD, so it could not rise.

"…ready to lease gold in increasing quantities should the price rise."

The meaning is UNMISTAKABLE. Subsequently, he said he "would control the gold market if he had to. "

The above leaves no shadow of doubt in the minds of any reasonably objective observers. The Fed DOES NOT WANT THE PRICE OF GOLD TO RISE! Period! Furthermore, the Fed will exercise whatever it takes to CONTROL THE PRICE OF GOLD.

It is within this context and framework the FRB study on gold was made.

Author Identities of the FRB Study on Gold

Firstly, the study was made under the auspices of the FRB. Its chief author is Dale Henderson, an employee economist of the FRB. Henderson was assisted by Stephen Salant of the University of Michigan - who, of course, was paid for his services by the FRB.

Whereas the study's title page provides the following "DISCLAIMER," one indeed must to be totally naïve to believe the "researchers" would be allowed to publish a study which is in conflict with the well-established FRB's Agenda regarding gold. Nonetheless, here is the disclaimer:

"The study represents the views of the authors and should not be interpreted as reflecting those of the Board of Governors of the Federal Reserve System or other members of its staff."

YOU be the judge!

Critique of the FRB "Study" on Gold

The extent of the criticism of this research paper is encyclopedic in volume. However, this writer will only touch upon the more blatant and flagrant exaggerations, omissions and generally misleading commentary.

Per the study, "Government gold policies are under active discussion. Recently there have been significant sales of gold by Belgium and the Netherlands, proposed future sales by Switzerland, and rumors of additional sales. This note is an analysis of several government gold policies, including the immediate sale of government gold stocks."

The above is a gross exaggeration. For the 23-year period from 1974 to 1996 there were only three countries, which sold a notable amount of gold per FRB's "standards." Let's take a careful look at this.

During two decades plus three years the selling countries divested themselves of a "grand-total" of a mere 55 million ounces (Canada 11.5, Belgium 20.6 and the Netherlands 22.5 million). We need to put this into proper perspective by comparing 55 million ounces sold in a 23-year period with the average daily gold trading volume in recent years at the London Bullion Marketing Association (LBMA). During 1997 and 1998 the LBMA traded on average 30 to 40 million ounces DAILY! As is painfully obvious to even a grade-school student, it would have taken only 2-3 DAYS to absorb all the gold sold by Canada, Belgium and the Netherlands. However, they spread the sales out over a 23-year period.

The study's reference to the sales is ludicrous. On the other hand the Study's omission of a very significant ramification regarding the gold sales destroys all semblance of the research group's credibility. The researchers "conveniently" failed to mention that the currencies of these three nations were mercilessly devalued in subsequent years as a direct result of selling off their gold reserves.

Per the study, "Cumulated net sales from 1974 to 1996 have been 72 million ounces."

Big Deal ! There are two bones to pick here. Firstly, no where in the entire "study" (and I use the word loosely) does it mention WHO BOUGHT THE GOLD. Needless to say someone did! And methinks most probably the buyers were a few financial institutions beefing up their gold reserves. Secondly, 72 million ounces spread over a 23-year period is minuscule in comparison to the average daily volume of the LBMA daily gold trading. Literally, ALL the 72 million ounces could have been absorbed in one week of trading without any significant ripple in gold's price.

Per the study, "In Chart 1, the left-hand pie chart shows that governments own about one-fifth of the estimated total world gold stock of about 5900 million troy ounces, which is the sum of government stocks and estimates of private aboveground stocks and gold yet to be mined."

"…and gold yet to be mined." Now what subterfuge are the researchers painting here? What possible AND LOGICAL significance can "gold yet to be mined" have in relation to this so-called "study?"

Per the study, "However, the importance of gold as possible future reserve asset, as part of a war-chest, and as a strategic material has clearly diminished in recent years and will, in all likelihood, continue to diminish."

It is my considered opinion the above statement was the original premise or purpose of the "study." The researcher's were engaged to attempt to try to prove this theoretical hypothesis. In their endeavor they conjured up 26 pages of rambling rhetoric, backed up by 33 pages of meaningless REFERENCES, incomprehensible FORMULAE and theoretical CHARTS -- all with the goal of confusing and misleading the reader.

The Current Reality of Gold

It is my considered opinion that two things are certain here.

  • that the gold price is depressed as a direct result of "… central banks standing ready to lease gold in increasing quantities should the price rise."
  • that worldwide market forces and/or securities law enforcement agencies will eventually and inevitably FORCE central banks to CEASE AND DESIST leasing gold.

The upshot of central bank ceasing to lease gold will necessarily be an explosive revaluation of its market value. Were I pressed to estimate how high the Midas metal might rise, it seems logical it may well repeat initially its meteoric climb of the 1970s - from $35 to $850 per ounce, or about 20 times today's value. However, the initial emotional excess of the market will most probably be corrected back to just 10 times today's value.


Red Baron

23 August 1999

(*) "A Note on Government Gold Policies" by the Federal Reserve Bank

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.
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