What is Happening to America's Gold?

July 25, 2001

This past December I wrote (Letter No. 276, "The Smoking Gun") about my discovery of a discrepancy between two reports that tracked the status of the US Gold Reserve. The Federal Reserve prepares both reports.

The first report is the balance sheet of the Federal Reserve, and the item of note is an entry entitled "Gold Stock". Because of its ownership of the Gold Certificates issued by the US Treasury, the Federal Reserve has a claim to the total US Gold Reserve, reportedly 261.6 million ounces. Therefore, this liability of the US Treasury - evidenced by its Gold Certificates to pay gold - is an asset on the balance sheet of the Federal Reserve.

The second report prepared by the Federal Reserve presents the US Reserve Assets, which records all of the Treasury's international monetary assets. These include the Treasury's holdings of foreign currencies, SDR's issued by the International Monetary Fund, and gold. The item of note in this report is also the gold stock, which again is this same US Gold Reserve.

Thus, it is clear that the gold held by the US Treasury - the US Gold Reserve - does double-duty. First, it provides a reserve at the Federal Reserve. In other words, because the Gold Certificates are an asset of the Fed, this claim to the US Gold Reserve imparts value to the liabilities of the Fed, of which the most important are the Federal Reserve Notes that we carry in our pocket as cash currency. But there is a second use as well because the US Gold Reserve is also recorded as part of the international monetary assets of the US Treasury, the total of which are a measure of this nation's financial strength relative to other countries.

The important point is that last December I observed that the weight of gold in these two reports was different, and I explained why each weight should always be identical. Thus, the Gold Certificates owned by the Federal Reserve should always be equal to the US Gold Reserves reported as part of the US Reserve Assets. They are the one and the same hoard of gold, and there is a body of federal law saying so. Furthermore, we have been repeatedly informed by various Treasury and Federal Reserve officials that the US government does not intervene in the gold market, that it does not trade gold for its account or the account of others, and that the US Gold Reserve remains in storage at Fort Knox and the other depositories. If their contention was true, then why are these two reports showing different weights for the same hoard of gold?

The answer I pointed out last December is that the clandestine activities of the Exchange Stabilization Fund (ESF) belie the pronouncements of Treasury officials about that department's so-stated inactivity in the gold market. We know that the ESF is active in the gold market because the Federal Reserve says so in its report of the US Reserve Assets.

This reports states that this weight of the US Gold Reserve is the "Gold Stock, including Exchange Stabilization Fund". Thus, the difference in weights between these two reports is attributable solely to the gold activity of the ESF. As I stated last December, there is no other alternative. So at the time I discovered this discrepancy I wondered how the Treasury would eventually come to explain this difference. How would they address the ESF's activity in the gold market? How would they explain away their previous statements on record that neither the US Treasury nor the ESF is trading gold?

In the months that have passed the Treasury has continued to deny US government activity in gold. But that is not all the Treasury has been doing. It has also been working hard to cover up its tracks.

The US Reserve Assets report now excludes all reference to the ESF, and previous reports already published have been changed. Not only were the figures adjusted, but all reference to the ESF has been eliminated. Reg Howe posted to his website http://www.goldensextant.com/commentary18.html#anchor12493 an excellent article addressing this change, and says: "…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." Indeed.

The Federal Reserve stopped mentioning the ESF in these reports in February. I guess the January 2001 report was already being prepared when my December article appeared, so it was too late to change that report. Thus, the US Treasury has enlisted the Federal Reserve as its partner in crime, as it is after all the Federal Reserve that prepares these reports. And what is that crime?

Without any explanation to anyone (including Congress to my knowledge), the US Treasury has taken steps that can be of no other purpose and have no other intent but to hide the truth. The ESF has been erased out of the US Reserve Assets report as if it never previously existed. Thus, these new reports being prepared by the Federal Reserve (and up to now they had probably been prepared this same way since the ESF was formed in 1934) ensure that the American public will no longer see this gold related activity by the ESF.

As I write this, I shake my head in disbelief. All I can think of are those old photographs showing sclerotic Soviet despots standing on the parapets of the Kremlin, which would somehow miraculously and inexplicably change over the years depending on who fell out of favor. Having had their erstwhile colleagues air-brushed out of those old photographs as well as Soviet history books, those despots who survived the purge acted as if the truth never existed. Are our Treasury officials no better than that with their apparent reckless disregard for the truth, air-brushing the ESF out of the Federal Reserve reports? Before you answer that question consider also another recent damning action by the Treasury.

This past April I wrote (Letter No. 283, "Behind Closed Doors") about the Treasury's unexplained reclassification of that part of the US Gold Reserve in the Treasury depository at West Point as "Custodial Gold". Using minutes of the Federal Open Market Committee of the Federal Reserve - actually, very revealing minutes referring to "gold swaps" that apparently were inadvertently not redacted before being made public - and by other corroborating evidence, I suggested that the term "Custodial Gold" meant that this part of the US Gold Reserve had been swapped with gold owned by the Bundesbank.

My assertion provoked a firestorm of controversy, but interestingly, no denial from the Treasury. But alarmingly, not only was the Treasury silent to me, its critics and others searching for the truth, the Treasury was apparently also silent to Congress. But recently, the Treasury has 'spoken'.

Last month all of the US Gold Reserve was reclassified. None of the gold stored at West Point, Fort Knox and the other depositories is called US Gold Reserve or even Custodial Gold. All of it is now labeled as "Deep Storage Gold". This action raises a lot of serious questions.

Does this change of label mean that this gold is no longer the US Gold Reserve, and if so, why? But if it still is the US Gold Reserve, then why did they change the label, and why don't they still call it the US Gold Reserve? How can the Treasury act unilaterally without any prior public notification informing anyone that this gold asset would be reclassified? What is the Treasury trying to cover-up by this latest action?

While I was pondering these and other questions, more intriguing news has come to light. The Federal Reserve has released to Senator Jim Bunning an internal memo to Alan Greenspan from Virgil Mattingly, the General Counsel of the Fed, whose quote of the "gold swaps" in the FOMC minutes was included in my April article.

Mr. Mattingly now says that he has no "clear recollection" of what he actually said at the FOMC meeting that fateful day, but nevertheless, he believes that his remarks "were transcribed inaccurately or otherwise became garbled." Hmmm, transcribed inaccurately. So he didn't say "gold swaps" to provide an example of ESF authority? Well, let's see. What could he have said, and how were those words transcribed inaccurately? Would the correct transcription have been "bold wasps"? Or did Mr. Mattingly really say that day that ESF authority was demonstrated by "cold swats"?

Actually, there is no need to guess what Mr. Mattingly really said. The Federal Reserve's website says: "Beginning with the 1994 meetings, the FOMC Secretariat produced the transcripts shortly after each meeting from an audio recording of the proceedings."

Therefore, there is no need to speculate what Mr. Mattingly really said. Let's go back and listen to the original tape of the meeting. And while we're at it, let the American public listen to the WHOLE TAPE, including all of the material and discussions about the ESF that were redacted from the transcript released to the public.

These recent developments have stimulated in my mind a lot of questions. Why is the US Gold Reserve no longer called that by the Treasury? Why did the Treasury force the Federal Reserve to change its reporting of the US Reserve Assets to exclude the gold trading activity of the ESF? And who is the mastermind behind what obviously is becoming a clear (and probably illegal) cover-up of the truth?

These are only a few of the questions that I would like answered. But all of them pale in comparison to one big question, what is happening to America's gold? ¤

EARMARKED GOLD I mention in the above article the recent essay written by Reg Howe, and also provide a hyperlink to it. I strongly recommend that you read this essay because it is full of informative material, including details of the so-called earmarked gold being stored at the Federal Reserve Bank of New York.

This gold is owned by foreign governments and institutions such as the International Monetary Fund, but is stored at the NY Fed. It is specially 'earmarked' in order to establish that this gold is not part of the US Gold Reserve, some of which is also stored at the NY Fed.

This weight of earmarked gold is one of the largest hoards in the world stored in any one place, but its size has been declining in recent years. There were 13,387 tonnes of earmarked gold stored at the NY Fed in 1990, but this total has dropped to 9,235 tonnes as of April 2001, which is the most recent report, a decline of 4,152 tonnes, or 31%.

There has been a pattern to this flow of gold out of the NY Fed, mainly reflecting bigger flows out when the gold price is rising. This pattern of activity may have been one of the factors that Alan Greenspan was referring to when he testified before Congress that "…central banks stand ready to lease [i.e., lend] gold in increasing quantities should the price rise."

However, that pattern has been changing. Since September 2000 at least 40 tonnes of gold have been removed from the NY Fed each month. Reg Howe notes that "the central banks have not only increased their leasing and sales activities but also made them less obviously targeted to price increases." This observation is important.

In my view, this change in the pattern of dishoarding from the NY Fed smacks of desperation. The shorts need physical bullion to keep the gold price from exploding upwards. The shorts can't get this bullion from new production or other sources, so they have to pull it out of the NY Fed, regardless whether or not the gold price is rising. More gold is coming out of the NY Fed each month than is being mined by South Africa, the world's largest producer.

According to the Washington Agreement, central banks cannot dishoard more than 400 tonnes per year, nor increase their lending of gold. If so, then why is gold being pulled out of the NY Fed at a rate over 480 tonnes per year? But the real picture is probably even worse.

It is likely that the 150 tonnes being sold by the Bank of England this year is stored in the BoE's own vault in London, not the NY Fed. So when taking the 80 tonnes difference calculated above and this 150 tonnes, we can conclude that 230 tonnes more gold is being dishoarded from the NY Fed than required for the central banks if they are indeed sticking to their Washington Agreement. I see only two interpretations to this analysis.

The obvious conclusion is that the central banks are breaking the Washington Agreement and selling more than 400 tonnes per year and/or increasing their gold lending. The less obvious conclusion is that the central banks that signed the Washington Agreement are indeed sticking to it, but some non-signatory is lending and/or dishoarding gold.

Though long-time readers of these letters know that I have a very low regard for central banks and their commitment to honor their agreements/promises, I think that they deserve the benefit of the doubt this time. My guess is that someone else is shipping this 40 tonnes of gold a month out of the NY Fed.

If we assume that the signatories of the Washington Agreement are indeed honoring their commitment, and given the size of the weight of this gold being shipped monthly out of the NY Fed, there are only two possible parties that have this much gold - the IMF and the US Treasury.

So could the Treasury somehow be swapping more gold with the Bundesbank? Or is the IMF involved? I think it is the latter.

Note all of the talk in this past weekend's G8 meeting about debt relief for poor countries, but in contrast to years past, there's been no mention of selling the IMF's gold to raise the money to provide this relief. Maybe they are purposefully not mentioning the IMF's gold because they are already tapping into it.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.