first majestic silver

The 'Smoking Gun'

December 12, 2000

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, 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 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 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,, 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.

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.

  1995 1996 1997 1998 1999
FRB year-end audit $11,050 $11,048 $11,047 $11,046 $11,048
US reserve assets $11,050 $11,049 $11,050 $11,041 $11,089
Difference in $'s (millions) $   - $  (1) $  (3) $   5 $ (41)
Difference in oz's (thousands) - (24) (71) 118 (971)

The above table reports movement in physical Gold. One can only imagine the size of the derivative position carried by the ESF as a result of its interventions to manipulate the Gold price. And imagine is all we can do because we've seen above that the ESF excludes from its financial statement all "transactions for future and spot delivery", which means perforce all derivatives are excluded.

Note that while the Gold in the US Reserve Assets is larger than the Fed's Gold Stock in most years, in 1998 the US reserve assets WERE LESS THAN the Gold Stock in the Fed. This means that the ESF on December 31, 1998 owed Gold, i.e., it had a Gold liability, the net effect of which when combined with the Gold Stock of the Federal Reserve reduced the total Gold Stock reported in the US Reserve Assets.

This revelation is important because it confirms the discovery made by Reg Howe in his April 9, 2000 study, which is referenced above. To quote from Reg's report: "From October 1998 through the end of the year gold prices remained weak and in declining mode, and the ESF had one of its most profitable quarters." We now know why it was so profitable. The table above shows that the ESF had a 118,000 ounce Gold liability on December 31st, 1998. As we can only see this weight of Gold on one day, it is probably just the tip of the iceberg. It seems logical the ESF carried a short position throughout all 92 days of what Reg describes as "one of its most profitable quarters."

The above table is important for two other reasons. First, it is clear that we are not talking here only about a one-time intervention on December 31, 1999. Instead, the above table proves there has been ESF activity since 1996, which is the second reason this table is important. It was 1996 when Gold broke below $380, which was the event that provoked me into investigating and eventually concluding that the falling Gold price was due to government intervention. I now have the smoking gun to prove it.

Needless to say, I was elated by my discovery, but I was also flabbergasted. Were the facts always right there under my eyes, but not apparent until I started comparing these two different reports? I kept asking myself whether I was missing something. After thoroughly researching my discovery a few times, my conclusion seemed solid, but I decided to keep an open mind about it until getting a second opinion. To do this, I turned to a long-time friend, Reg Howe.

In addition to his research that I reference above, Reg has completed some brilliant research about the build-up in Gold derivative positions at the major bullion banks. I highly recommend his website,, where his research is posted.

Reg investigated my findings even more thoroughly than I did. He delved into the old public records in Harvard's library, comparing the differences between the Gold Stock included in the US Reserve Assets report and the Gold Stock reported on the Federal Reserve's balance sheet. In the end, Reg's work corroborated mine. The difference between these two reports can only be explained by ESF activity.

Reg and I subsequently met to discuss our notes. He came up with what I believe to be a plausible reason to explain why this activity by the ESF is being reported by the Federal Reserve. It seems that one arm of government at a very low level was reporting events that other people at higher levels in another arm of the government were denying ever happened.

If you have ever visited the Gold vault buried deep below the basement of the Federal Reserve Bank of New York, you will see countless cubbies where the Gold is stored. Each of those cubbies is identified with a unique number that corresponds with the owner of the Gold stored in it. One of those cubbies is owned by the ESF. Reg suggested to me, and I agree with his thinking in this regard, that apparently low level Federal Reserve staff have been dutifully recording movements of Gold into and out of that ESF cubby, and recording them in the month-end reports of US Reserve Assets, probably unbeknownst to the Treasury officials who have been denying any involvement by the ESF in the Gold market.

I uncovered this smoking gun several weeks ago, but Reg and I have kept it to ourselves. Reg asked me to not disclose it until he prepared and submitted the brief for his lawsuit against the Bank for International Settlements, and I of course agreed to his request. Last week Reg filed his brief with the federal court in Massachusetts, so I am now making this research public.

Like the investigations that pursued Nixon and Clinton until the truth emerged, so too will the current investigation of the Gold market continue. It is self-evident to anyone who understands Gold that the whole truth about the Gold price over the past few years is only now starting to emerge.

Those are bold words and some readers may no doubt be questioning why the US government would go to all this trouble. What does it gain by manipulating the Gold price?

The obvious answer is that Gold is widely followed by many as an indicator of inflation. If the Gold price were rising, worry about inflation would also rise. Therefore, by manipulating the Gold price to keep it from rising, resurgent inflation can be made to appear less troublesome.

There is some merit to this argument, particularly in an environment where crude oil prices have nearly trebled in two years and natural gas prices have quadrupled in about eight months. But I think the answer lies somewhere else. More is at stake here than just the appearance of whether or not inflationary pressures are building.

Ten years ago when the banking industry was going through one of its periodic crises, the Federal Reserve manipulated interest rates to the banks' benefit. The Fed dropped short-term rates, while holding up medium-term rates, widening the spread between these two maturities to an unusual level. Banks then borrowed short-term money at the resulting artificially low rates and purchased medium-term government paper, earning the spread. These induced profits were then taken into the banks bottom line, helping them to charge off their bad loans without significantly impairing earnings. The banks were bailed-out.

In that environment, with banks frantic in their efforts to widen spreads to re-build the balance sheet, Gold offered an attractive alternative. Why not borrow Gold at rates under 1% and buy government paper earning more than 5%?

Because Gold's natural interest rate is so low, Gold has always offered this possibility for profit, provided the Gold price did not rise. If the Gold price rose by more than the 4% interest rate differential, the profits the banks hoped to earn would become losses. Despite this risk, the banks began to borrow Gold from central banks, sell this Gold into the spot market for Dollars, and use these Dollars to purchase government paper. It was such a profitable business that the banks – as they are wont to do – overdid it. When Gold hit $416 in early 1996, I believe the banks, staring at huge losses, panicked. They recognized that they could never buy in the market the weight of Gold needed to cover their short position. So the banks did what they always do when they get into trouble – they go straight to the US government looking for a bail-out.

Given the intractable nature of this particular problem, that the banks were short more than two times the weight of Gold mined each year, the usual bail-out practice of throwing taxpayer Dollars at the banks would not work. Unlike Dollars, Gold cannot be created out of thin air. So the Treasury sent the ESF to the rescue in 1996 to manipulate the Gold price, presumably forever, to prevent the banks from taking big losses.

So today the banks are again getting bailed out. Banks are short Gold, and the ESF is keeping the Gold price under control. Therefore, the banks do not have to report big losses on their short Gold positions, which would obviously be the result if the Gold price were allowed to rise to its natural level in response to freemarket forces of supply and demand.

Of course, not all banks are short Gold. Many bankers were wise enough not to get themselves into the predicament of owing physical Gold that they cannot return to their lenders (i.e., the central banks) without causing the price to skyrocket. But those banks who were foolish enough to get themselves stuck in this predicament (i.e., the big US and European money center banks), do what the big banks always do when they get into trouble. They go hat in hand to their respective government and to that government's captive central bank in order to get bailed-out. It appears that this time the bail-out is occurring not just in the US. I believe that the Bank of England was induced to make its peculiarly timed announcement by the dire straits of one or more UK banks hopelessly short bullion.

Throughout the 20th century governments have always been manipulating the Gold market; only the way they go about it has changed. Until the Gold Standard was abandoned in 1971, government's manipulated the Gold market by dishoarding Gold. For example, the Johnson administration dishoarded 300 million ounces at $35 per ounce in a vain and fruitless attempt to make the Dollar look better. Now governments manipulate the price surreptitiously and covertly.

Sometimes our progress only comes after we take one step forward, and two steps back. I feel that way at the moment. While this new discovery about ESF activity is definitely a step forward, we have also taken two steps back because this new discovery calls into question the previous assurances I received from the Treasury Department that the Gold in Ft. Knox and the other depositories is intact. I'm am doubtful now about their assurances. Enough new evidence has emerged to suggest that I was disinformed by the Treasury Department.

So what's the next step? My only hope is that the above information will contribute to the growing body of research about the Gold market and that it will help lead to a quick admission by the Treasury Secretary or the President that the Gold price has indeed been manipulated. Reg's law suit against the BIS may prove to be an important step in that direction. And hopefully, it will be the last step needed before the whole truth is finally told.

This report was written by James Turk and published in his newsletter,Freemarket Gold & Money Report, which retains the copyright. This report was posted with permission at, and this permission to post has also been granted

The periodic symbol for gold is AU which come from the Latin for gold aurum.
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