Published on Gold Anti-Trust Action Committee (http://www.gata.org)

Another congressmen inquires about gold market

By cpowell
Created 2000-01-27 08:00

11p EST Tuesday, January 25, 2000

Dear Friend of GATA and Gold:

Here's commentary I've been eagerly awaiting, Reginald
H. Howe's observations on both Fed Chairman Alan
Greenspan's response to GATA and today's gold auction
by the Bank of England. Reg is a lawyer from Harvard
and a former mining company executive. He posts his
essays at www.GoldenSextant.com [1].

Please post this as seems useful.

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

* * *

Gold Shenanigans: Suspicion Shifts to the Treasury

By Reginald H. Howe
www.GoldenSextant.com [2]
January 25, 2000

Fed Chairman Alan Greenspan denies that the Federal
Reserve sells, leases, or trades in gold or gold
derivatives. In a letter to Sen. Joseph I. Lieberman,
D-Conn., responding to questions from the Gold Anti-
Trust Action Committee, the Fed chairman goes even
further: "Most importantly, the Federal Reserve is in
complete agreement with the proposition that any such
transactions on our part, aimed at manipulating the
price of gold or otherwise interfering in the free
trade of gold, would be wholly inappropriate."

Apart from the Federal Reserve, the only other arm of
the U.S. Government with broad statutory authority "to
deal in gold, foreign exchange, and other instruments
of credit and securities" is the Exchange Stabilization
Fund. (31 U.S.C. sec. 5302b). "Subject to the approval
of the President, the fund is under the exclusive
control of the Secretary [of the Treasury], and may not
be used in a way that direct control and custody pass
from the President and the Secretary." (31 U.S.C. s.
5302a2.) The Exchange Stabilization Fund is also
responsible for administering U.S. holdings of Special
Drawing Rights. (22 U.S.C. sections 286o, 286p.) The
Treasury secretary is required to provide detailed
monthly financial reports of its activities to the
House and Senate Banking Committees. (31 U.S.C.
sections 5302c1.)

My suggestion that the Fed might be selling gold call
options represented an effort to assign some credible
motive to the surprise announcement of British gold
sales on May 7, 1999. At the time gold was threatening
to move above $300/oz. due in part to increasing doubts
that the proposed International Monetary Fund gold
sales would be approved. Short positions in gold were
thus in considerable peril. The manner of the British
sales -- periodic public auctions versus unannounced
sales through the Bank for International Settlements --
belied any effort to get top dollar and smacked of
intentional downward manipulation of the gold price.

All indications are that these sales were ordered by
the British government over the objection of Bank of
England officials. British Treasury officials provided
some spurious reasons for the sales but no persuasive
ones, leaving only one logical conclusion: The gold
sales were directly ordered by the prime minister for
unknown political or other reasons. What is more, his
reasons are unlikely to have been frivolous. As leading
supporters of the proposed IMF gold sales, the British
clumsily put themselves in the position of front-
running them, and ultimately the British sales were an
important catalyst in forcing the IMF to change tack.

These developments led me to hypothesize a scenario in
which U.S. officials called on Prime Minister Tony
Blair for assistance in containing the gold price while
they unwound short positions put in place to cap it.
Chairman Greenspan makes no mention in his letter to
Senator Lieberman of any activities by the U.S.
Treasury or the Exchange Stabilization Fund designed to
influence the gold market. In responses to questions
propounded earlier by GATA, a representative of the
Treasury dodged questions relating specifically to
writing or otherwise dealing in gold call options.
Surely former Treasury Secretary Robert Rubin was aware
of these possibilities since his former firm, Goldman
Sachs, is Ashanti Gold's principal gold banker and a
major purveyor of gold derivatives. Maybe the Treasury
will be more forthcoming in its further responses to
Senator Lieberman.

In the meantime, results of the Bank of England's
fourth auction held this morning are available at:

www.bankofengland.cp.uk/pressreleases/2000/009.htm [3]

The auction was 4.3 times oversubscribed and the
allotment price was US$ 289.50/oz. -- that is, all bids
over this price were filled and bids at this price were
filled on a proportional basis. The allotment price was
almost $2 above yesterday's close in New York and $1
over the London spot price ahead of the auction. The
results should have been bullish for gold, and gold did
trade slightly higher in London immediately after. But
as soon as the COMEX opened in New York, gold fell back
sharply to the $287/oz. level with Goldman Sachs and
Chase reported as heavy sellers.

Could it be that the Treasury did not want gold rising
while stocks are under pressure, not to mention with Al
Gore facing a big test in New Hampshire? (If I were
Senator McCain, I'd take a careful look at the monthly
reports filed with the Senate Banking Committee by the
Exchange Stabilization Fund.) More importantly, even
with reported lease rates quite low, physical gold in
size now appears to command a slight premium over paper
-- not a good sign for the shorts.

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