New GATA ad posted at


12:05a EDT Monday, May 15, 2000

Dear Friend of GATA and Gold:

Reginald H. Howe of demonstrates
in his latest essay that the Federal Reserve knows more
about the manipulation of the gold market than it is letting
on. His essay is accompanied by three important charts that
cannot be reproduced in this simple email. So I have copied
the text here, made parenthetical insertions showing where
the charts appear, and invite you to inspect them with the
whole essay at:

Please post this as seems useful.

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

* * *

The Fed: Up to its Earmarks
in Gold Price Manipulation?

By Reginald H. Howe
May 15, 2000

Testifying before Congress in mid-1998 on the subject
of over-the-counter derivatives, Federal Reserve Board
Chairman Alan Greenspan set off a minor firestorm in
the gold community when he observed: "Nor can private
counterparties restrict supplies of gold, another
commodity whose derivatives are often traded over-the-
counter, where central banks stand ready to lease gold
in increasing quantities should the price rise."

In a letter dated Jan. 19, 2000, to U.S. Sen. Joseph I.
Lieberman, D-Conn., responding to questions posed by
the Gold Anti-Trust Action Committee, Greenspan
affirmed that the Fed owns no gold and does not
intervene in the gold market. Emphasizing this point,
he wrote: "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."

Further explaining his prior statement to Congress,
Greenspan added: "The observation simply describes the
limited capacity of private parties to influence the
gold market by restricting the supply of gold, given
the observed willingness of some foreign central banks
-- not the Federal Reserve -- to lease gold in response
to price increases."

Subsequently, on March 29, 2000, Greenspan wrote to
U.S. Rep. Ron Paul: "I don't know if I will be able to
end speculation about U.S. involvement in the gold
market, but I can say unequivocally that the Federal
Reserve Bank of New York has not intervened in the gold
market in an attempt to manipulate the price of gold on
its own behalf or for the U.S. Treasury or anyone

Mr. Greenspan, meet Elwood, or more specifically,
Elwood's charts.

Like many in the gold community, including myself and
many who e-mailed me on the subject, Elwood was
perplexed by the export figures for nonmonetary gold
released monthly by the U.S. Department of Commerce.
Determined to get to the bottom of the matter, he
decided to chart on a monthly basis both the Commerce
Department's export and import figures for nonmonetary
gold and the figures given in the Federal Reserve
Bulletin for reductions in "earmarked" gold held for
foreign official agencies, primarily foreign central
banks. Although he did not really need it, Elwood
sought my assistance. As a result, not only did I come
to have great confidence in the accuracy of his work,
but also he agreed to custom-tailor for this commentary
two special versions of the chart referenced at the end
of my prior commentary. So, with special thanks to
Elwood for all his work, here is the first chart:


What is immediately apparent from this chart is that
disbursements of gold from the earmarked accounts of
foreign central banks and other foreign official
agencies at the New York Federal Reserve Bank, shown in
blue, are included in exports of nonmonetary gold as
reported by the Commerce Department, shown in red.
Plainly there is no realistic sense in which these
withdrawals of foreign official gold from the Fed are
U.S. exports. Possibly they are reported this way by
mistake, perhaps reflecting the fact that nonmonetary
gold cannot be distinguished from monetary gold at the
points where exports are measured. Intentionally or
not, the effect is to gild the export numbers, making
the trade balance appear better than it is.

At the end of World War II, the vast bulk of official
world gold reserves were stored in the United States.
By 1974, following the breakdown of the Bretton Woods
international monetary system, approximately 17,000
tonnes of foreign official gold remained in earmarked
accounts at the New York Fed. This number declined
gradually in subsequent years, to about 13,400 tonnes
in 1990. Since 1992 the pace of withdrawals has picked
up, both absolutely and in percentage terms as shown in
the following table:


In prior commentaries, I have hypothesized that any
coordinated, large-scale official scheme to cap the
gold price probably began in 1995 with the severe
worsening of the Japanese economic crisis, continued
through 1998 with the support of the major industrial
nations, and then ran into European resistance after
the successful launch of the euro in 1999. (See
generally "Two Bills: Scandal and Opportunity in Gold," With the Europeans stepping
back from further participation and plans for gold
sales by the International Monetary Fund going awry,
the remaining gold price manipulators under American
leadership were forced to resort in desperation to
British gold sales, provoking European retaliation in
the form of the Washington Agreement.

Reductions in gold in the foreign earmarked accounts at
the Fed could just as easily represent leased gold as
outright official sales. Indeed, leased gold exported
from the United States by the private bullion banks
that leased it might be more easily mistaken for
nonmonetary gold exports than official gold sales,
which often go directly to other official agencies. The
volume of Fed outflows, around 1,250 tonnes in the
1995-1998 period, is as consistent with leasing as with
sales. This amount is about the same as the proposed
Swiss gold sales, which in a prior commentary I
suggested might be aimed at covering a roughly
equivalent amount of gold previously leased by European
central banks.

Obviously it is impossible to tell from the Fed's
numbers whether the gold outflows from its foreign
earmarked accounts represented gold for lease, outright
sale, or some combination of the two. But, taking
Greenspan at his word, as of mid-1998 foreign central
banks had in the past and stood ready in the future to
lease gold into rising prices. Of course the reason for
leasing is not that ordinarily given by central banks,
which claim that it is principally a means to earn
income on an otherwise sterile asset. Looking at the
chart, which shows lease rates in brown, there does not
appear to be any significant correlation between lease
rates and Fed outflows.

Greenspan did not reveal the source of his knowledge
about the "observed willingness" of foreign central
banks to engage in leasing for the purpose of
controlling the gold price. Nor did he say why it was
"appropriate" for them to do so but not the Fed. In any
event, his knowledge of their activities could well
have come to him as he watched foreign earmarked gold
flow out of the New York Fed. Particularly since 1995,
spikes in these outflows appear to correlate quite
closely with both gold price rallies and periods of
international financial distress. To facilitate
analysis of this relationship over the critical past
three years, Elwood has obliged with a second chart:


In this chart, Fed outflows for each month are spotted
at the end of the month, as are U.S. exports of
nonmonetary gold. For technical reasons, average
monthly gold prices, which ought to be spotted mid-
month, must be put at the beginning of the month. But
to provide accurate reference to gold prices, they are
plotted daily in the top section of the chart.

When the Asian financial crisis first broke in early
1997, Fed outflows initially surged into relatively
high and strong gold prices. As it became apparent that
the Asian crisis would not only dampen demand for gold
in an important market but also precipitate some
distress selling, gold prices began a sustained decline
into the beginning of 1998. Fed outflows also declined
and ceased. With the recovery of gold prices in early
1998, Fed outflows again picked up, showing small
spikes with each rally. In 1995 and 1996, a similar
pattern of otherwise quiescent Fed outflows spiking
upward with gold price rallies is shown on the first

When the Russian default and the Long-Term Capital
Management fiasco struck in the fall of 1998, gold
prices and Fed outflows again surged together. But then
something strange happened. As gold prices continued
their upward advance, Fed outflows fell back. But total
U.S. gold exports, in amounts far in excess of ordinary
monthly levels of around 25 tonnes, still spiked into
the rising gold prices. Where did this gold, emanating
from the United States but not from foreign earmarked
accounts at the Fed, come from?

One obvious suspect is the U.S. Exchange Stabilization
Fund, which also has a gold account at the New York Fed
and thus, assuming it had the gold, could have released
it into the market through substantially the same
channels as previously used for foreign earmarked gold.
The ESF may also have had an additional motivation at
this time. Impeachment proceedings were moving into
full gear, and any serious financial disturbance might
easily have been fatal to the Clinton presidency.

Where might the ESF have obtained some gold? When the
Asian financial crisis hit Korea in late 1997, there
was speculation that the ESF might intervene with some
sort of support package, although whether it did so has
never been confirmed. Korea's own "Save the Nation"
campaign took in about 200 tonnes of gold volunteered
by its citizens. Accordingly, it is possible that the
ESF bought or otherwise obtained some or all of this
gold as part of a rescue package, and thus had it
available in the United States in 1998.

Two other points bear on this theory: (1) Most of the
Korean gold must have been scrap, and therefore in need
of some recycling, which could have been done in
private U.S. refineries and/or through the government's
own gold recycling program; and 2) This sort of
activity could also explain the one-time entry for
commissions that appeared on the ESF's third quarter
1999 financial statements.

Wherever the gold came from in the fall of 1998, by the
end of the year gold prices were comfortably under
control, well below the $300/oz. level. Here they
rested until April 1999, when increasing doubts
surfaced regarding the ability of the IMF to secure the
required approvals for its proposed gold sales. Gold
prices began to rally, closing near $290 on May 6, and
threatening the $300 level. At the same time there was
just the tiniest blip upward in outflows of foreign
earmarked gold from the Fed and total U.S. gold
exports. Apparently these sources, including the
mysterious gold that appeared during the previous fall,
were tapped out.

Then, on May 7, 1999, Her Majesty's Treasury intervened
with its yet to be explained and totally unexpected
announcement of gold sales. British gold reserves are
under the jurisdiction of the British Treasury's
Exchange Equalisation Account, which was the paradigm
for the ESF. Out of gold, either from its own account
or from foreign earmarked accounts, the ESF may simply
have executed a handoff of the gold control ball to the
EEA. The British announcement sent gold prices into a
steep slide, but the European central banks were far
from supportive.

On Sept. 26, 1999, they announced the Washington
Agreement. In the gold panic that followed some foreign
official gold was obtained from accounts at the New
York Fed. This gold, apparently unavailable in May, was
thrown at spiking gold prices. Whatever extra gold that
could be found in the United States was tossed into
total U.S. exports. But these supplies were far from
sufficient to meet the demand from panicked shorts, and
the newest form of alchemy was pressed into service
without restraint: paper gold, also known as gold

In the last half of 1999, Citibank, former Treasury
Secretary Rubin's new firm, increased the total
notional amount of its gold derivatives by more than 60
percent, from $7.2 billion to $11.8 billion. But among
U.S. commercial banks, Citibank is a distant third in
this business. It could not fill the burgeoning demand.
So the ESF and the Fed were forced to go where the
Treasury used to go before the Fed succeeded J.
Pierpont Morgan in 1913 as the last resort in a U.S.
financial crisis.

Spouting gold derivatives in abundance, the House of
Morgan spooked the longs and gained a reprieve for the
shorts. Time was when a true Morgan rescue with real
money marked a turning in the financial tide, and
Morgan remained on the scene to guide the recovery. But
as John Hathaway notes in his new essay, "J.P. Morgan
To The Rescue"
(, at the end
of 1999 Morgan shut down its New York gold trading
operations and moved them to London, conveniently close
to the British Treasury and further from the view of
U.S. regulators.

Whatever Greenspan may have intended to convey about
the risks of gold derivatives and the knowledge or
participation of the Fed in any scheme to control gold
prices, he has not painted a very accurate picture of
the true situation. Indeed, the notion that central
banks possess a general power through leasing to
control gold prices over the longer term is not just
mistaken but dangerous. It is a prescription for a gold
banking crisis. This subject will be addressed in my
next commentary, together with the possible connection
of the Swiss gold sales to the activities hypothesized
in this commentary and dramatized so well by Elwood's
charts, for which I again express my sincerest thanks.