Link to original copy of Reg Howe''s latest essay


1p ET Friday, July 10, 2001

Dear Friend of GATA and Gold:

GATA consultant Reginald H. Howe, plaintiff in the lawsuit
against the Bank for International Settlements, the U.S.
Federal Reserve, the U.S. Treasury Department, and the
bullion banks, continues to develop documentary evidence
of the U.S. government's surrpetitious intervention in the gold
market to suppress gold's price.

Howe's latest essay, to be posted shortly at his Internet site,, may be his most important ever.
It appears below, but this email file is not able to present it
as well as it will be presented at the Golden Sextant -- we
can't list the Internet links as well, or display the charts as well.
So you may want to view it at later.

It would be good if GATA supporters in the United States
who have written to their congressmen wrote to them again
with a copy of this essay, to ask them to determine from
the Federal Reserve and the Treasury Department
whether the essay correctly describes U.S. government
policy toward gold, and, if not, to determine where it is

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * *

Judicial Holding Pattern: Giving the Defendants Plenty of Rope

By Reginald H. Howe
July 20, 2001

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;
the monthly 3.13 tables can be found at

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

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 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, 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 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

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
tes 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 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
(, 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

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 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

* * *

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.

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

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

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
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.