U.S., European interests converging on higher euro and gold


10:44a ET Saturday, July 28, 2001

Dear Friend of GATA and Gold:

In a new essay, James Turk of the Freemarket Gold and
Money Report has documented how the U.S. Treasury
Department's Exchange Stabilization Fund is intervening
in the gold market and how the Treasury Department is
undertaking to conceal the intervention.

Turk's essay -- "What is Happening to America's Gold?" --
appears below.

GATA asks its supporters in the United States to make
a printed copy of this essay and send it to their U.S.
senators and U.S. representative with a covering letter
asking their members of Congress to obtain a full and
candid response to the essay from the Federal Reserve
and the Treasury Department.

We have indications that our writing letters to Congress
to request such information is having a big impact. We
just can't let up. Thanks for your help.

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

What Is Happening to America's Gold?

By James Turk
Copyright 2001, The Freemarket Gold & Money Report
Reprinted by permission

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 U.S.
Gold Reserve. The Federal Reserve prepares both

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 U.S. Treasury, the Federal
Reserve has a claim to the total U.S. Gold Reserve,
reportedly 261.6 million ounces. Therefore, this
liability of the U.S. 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 U.S. 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 U.S.
Treasury -- the U.S. 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 U.S. 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 U.S. Gold
Reserve is also recorded as part of the international
monetary assets of the U.S. 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
U.S. Gold Reserves reported as part of the U.S. Reserve
Assets. They are the one and the same hoard of gold,
and there is a body of federal law saying so.

Further, we have been repeatedly informed by various
Treasury and Federal Reserve officials that the U.S.
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 U.S. 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

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 U.S. Reserve Assets.

This reports states that this weight of the U.S. 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 U.S. Treasury nor
the ESF is trading gold?

In the months that have passed the Treasury has
continued to deny U.S. 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 U.S. 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
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 U.S. 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

Without any explanation to anyone (including Congress
to my knowledge), the U.S. 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 U.S. 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 U.S. 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 U.S. Gold Reserve had been swapped
with gold owned by the Bundesbank.

My assertion provoked controversy but no denial from
the Treasury. 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 U.S. 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 U.S. Gold Reserve, and if so, why? But if it
still is the U.S. Gold Reserve, then why did they
change the label, and why don't they still call it the
U.S. 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 Sen. Jim Bunning an internal memo to
Alan Greenspan from Virgil Mattingly, general counsel
of the Fed, whose quote of the "gold swaps" in the FOMC
minutes was included in my April article.

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 Mattingly really say that day that ESF authority
was demonstrated by "cold swats"?

Actually, there is no need to guess what 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
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 U.S. Gold Reserve no
longer called that by the Treasury? Why did the
Treasury force the Federal Reserve to change its
reporting of the U.S. 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) coverup 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

What is happening to America's gold?

* * *

A note on "earmarked gold."

I mention in the above article the recent essay written
by Reg Howe, and 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 New York Fed. It is specially
"earmarked" in order to establish that this gold is not
part of the U.S. Gold Reserve, some of which is also
stored at the New York 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 New York
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 percent.

There has been a pattern to this flow of gold out of
the New York Fed, mainly reflecting bigger flows out when
the gold price is rising. This pattern of activity may
have been one of the factors that Fed Chairman Alan
Greenspan was referring to when he testified before
Congress that "central banks stand ready to lease" --
that is, 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 New York 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 New York Fed smacks of desperation. The shorts
need physical bullion to keep the gold price from exploding.
The shorts can't get this bullion from new production
or other sources, so they have to pull it out of the
New York Fed, regardless of whether the gold price is
rising. More gold is coming out of the New York 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 New York Fed at a rate more
than 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 New York 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 New York 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 New York 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 New York Fed, there are only two
possible parties that have this much gold -- the
International Monetary Fund and the U.S. 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 G-8 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.