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

Now we have to sustain this lawsuit

By cpowell
Created 2000-12-10 08:00

Copyright 2000 by the Freemarket Gold & Money Report.
Reprinted by permission.

By James Turk
Freemarket Gold & Money Report
Letter No. 276
December 11, 2000

The June 1972 break-in at the Democratic headquarters
in the Watergate building in Washington seemed at the
time suspicious to even the casual observer of
government intrigue. The five burglars who were
arrested had known ties to the government, including
links to agencies involved with espionage and so-called
"dirty tricks." So it is not surprising that before too
long, those links were reaching up to the inner circles
of the White House.

Throughout the early months of the Watergate
investigation, President Nixon denied any involvement
and resolutely proclaimed his ignorance about who
directed the botched burglary. His regal
pronouncements, which were designed to draw a safety
net around the Oval Office, put into a difficult
position the investigators who were alleging that the
President was not an innocent bystander.

Their allegations subjected them to derision by many.
After all, here was the President of the United States
denying their charges, using the integrity of his
position to proclaim his innocence. So how could these
hot-shot investigators of the burglary and its
aftermath question Mr. Nixon's honesty? And where was
the proof to support beyond any reasonable doubt, their
incredible allegations of the president's complicity in
the burglary?

For a time, Nixon managed to divert the truth.
Nevertheless, the doubts not only persisted, they grew
as the evidence mounted. Unfortunately for the
investigators, the evidence was essentially
circumstantial, so they were in a predicament. They
intuitively knew that they were on to something, but
they kept coming up short. If they only had a 'smoking
gun' they lamented, they could prove not only Nixon's
complicity in the planning of the burglary, but also
that he was lying in an attempt to cover up the truth.
Ever since, the term smoking gun has come to symbolize
the all important piece of evidence that was needed to
prove to the American people that someone in the
government was lying to them.

The investigators hot on Nixon's tail eventually got
their wish. The audio tapes of Nixon's conversations in
the Oval Office were finally discovered, and they
proved to be the smoking gun that unseated Nixon.
Another example of a smoking gun was Monica Lewinsky's
now infamous blue dress, which proved that President
Clinton had lied to the American people. Given my
recognition of the magnitude of these events, I do not
use the term smoking gun lightly. But I have uncovered
a smoking gun that proves beyond any reasonable doubt
that the government is lying to us again.

I have been contending for some time, as have a growing
chorus of other people, that the gold market is being
manipulated and that in all probability based on the
circumstantial evidence available to date, the U.S.
government is directing this manipulation. I have now
uncovered from public records indisputable evidence
that substantiates these allegations, which thereby
proves that the repeated, blatant government denials of
any involvement in the gold market are patently false.
In short, I have found a smoking gun. Some background
information will put this new evidence into

Readers of these letters over the past few years are no
doubt aware that I have been looking for a smoking gun.
These investigations began not too long after gold
broke below $380 in November 1996. That event was
important to me, and I remember very well mentioning to
a friend at the time that "it shouldn't have happened."
I meant that gold was telling us something important,
namely, that for reasons that were not yet clear to me,
gold was headed lower notwithstanding the fundamental
and technical factors that were suggesting a positive
outlook for the gold price.

By early 1997, I sensed that we faced something that
could not be explained by normal market forces. For
example, in an article purposefully entitled "Managing'
Markets" in Letter No. 203 dated April 21, 1997, I
wrote about the peculiar events that had just occurred
only a few days before on April 11, after a much higher
than expected inflation number was released at the open
of that day's trading. After describing the action in
the gold and T-Bond markets, and to explain what had
happened when prices reversed sharply in an unusual and
abrupt change of trend, I said: "It appeared that some
powerful force had entered the market."

I went on to suggest that this force was intervention
by the U.S. government, but my conclusion was based on
evidence that was totally circumstantial. So I
continued my investigations, waiting for the all
important solid proof to appear that the government was
indeed manipulating the gold price.

Interestingly, while few questioned whether the
government did intervene to manipulate the T-Bond price
that day, almost no one accepted the notion that the
government acted to manipulate the gold price. I found
these divergent views perplexing.

Given what happened in the market that fateful day, it
was inexplicable to me that most everyone back then was
willing to acknowledge the government could intervene
in the T-Bond market, but not in the gold market.
Nevertheless I accepted this divergent and to my mind,
peculiar thinking because the government had never
formally acknowledged, at least since the 1970s anyway,
that it was intervening in the gold market. I came to
the realization that without that acknowledgment, or
unless clear evidence of government intervention could
be provided in the absence of any government
acknowledgment, participants would greet claims of
government intervention in the gold market skeptically,
with one exception.

Those intimately involved with and experienced in the
gold market who were willing to open their minds to
view the mounting -- albeit circumstantial -- evidence,
accepted the idea of government intervention readily
and willingly. But this limited group who believed
there was government intervention in the gold market
was about to grow when another piece of evidence
emerged the following year. This evidence caused more
people to accept the explanation that the gold price
was weak because the U.S. government was intervening in
the gold market.

In an article entitled "Grist for the Conspiracy
Theorists" published in Letter No. 233 on October 26,
1998, I commented on an important statement made by
Alan Greenspan. Here is what I wrote:

"In testimony before the House Banking Committee on
July 24, Mr. Greenspan said: 'Central banks stand ready
to lease [i.e., lend] gold in increasing quantities
should the price rise.' In short, central banks stand
ready to use their hoard of gold to keep its price from
rising. Maybe the conspiracy theorists have found their

Mr. Greenspan's statement received widespread
attention, but in the end, it fell short of the
definitive proof needed to establish government
complicity to manipulate the gold price. He did not
name any specific central banks, so if his statement
was taken within the context of his entire testimony,
it could be interpreted as a theoretical comment about
government potential, rather than actual deed.

I do not agree with this limited interpretation of this
important remark, given the frank and honest
disclosures that appear in the overall body of Mr.
Greenspan's speeches and testimony while he has been
Federal Reserve chairman. In short, given the
insightful views on gold expressed by Mr. Greenspan on
numerous occasions, as well as his perceptible fondness
for the automaticity of monetary policy under the
classical gold Standard, I think he was telling us
something from the inside, and doing it without
breaching the constraints within which he must operate.
Perhaps at the very least he was telling us that in the
present circumstances, gold could not reliably serve,
as it has in the past, in its well proven role as an
indicator of inflation. In any case, more proof was

To many that proof came in May 1999 with the peculiarly
timed announcement by the Bank of England that it
intended to dishoard one-half of its gold reserve.
Aside from the timing, the fact that the BoE announced
the sale in advance seemed sure to guarantee the lowest
possible price for their gold, a result that would
clearly not be in the best interests of the British
people. So it seemed obvious their decision was driven
by other reasons.

In an attempt to calm the firestorm provoked by their
announcement, the BoE gave a spurious reason to justify
their actions, namely, to give the gold market
"transparency." This reason was met by widespread
derision, as everything else the Bank of England does
regarding gold has no transparency whatsoever. For
example, the BoE flaunts generally accepted accounting
principles by not distinguishing between nor properly
reporting separate asset categories for gold that it
owns (essentially a cash item on the balance sheet) as
opposed to gold it has loaned (which is of course a
receivable). Instead, the BoE reports these very
different assets as one item.

Given that the Blair government only arrived on the
scene in mid-1997, after the price manipulation in the
gold market had already begun, it was clear that the
BoE was not the instigator of the gold price
manipulation. Mr. Blair's Treasury Minister, Gordon
Brown, was just a small pawn in a big picture, and that
as a consequence, the BoE was just doing a favor for
someone else. Who had that kind of power over another
country's central bank and Finance Ministry? The
evidence continued to point to the U.S. government. So I
continued my research, which was now directed toward
the U.S. gold Reserve stored in Fort Knox, which formed an
important part of the total U.S. reserve assets.

As recorded in these letters, in August 1999 I wrote to
Treasury Secretary Summers asking for various
information about the gold stock, including whether the
gold reserves were being audited. After receiving no
response, I used the good offices of my congressman,
who was able to get a reply from Treasury officials,
but curiously, not from Mr. Summers himself. Based on
this correspondence and the reports that I received, I
concluded in Letter No. 262 dated April 10, 2000: "It
would appear that the gold reserve is properly stored
in Fort Knox and the other storage vaults. It would
appear that the gold reserve is being properly
accounted for and audited."

Note my purposeful use of the word appear. After all, I
hadn't personally visited the vaults and counted the
bars, so I was only drawing and properly stating a
conclusion based upon indirect evidence, namely, the
correspondence and reports that I received. And given
Nixon's and Clinton's lies, can we really trust
government not to lie about something as important as
the gold reserve, particularly if they were, as I
increasingly suspected, surreptitiously intervening in
the gold market?

Also, in the back of my mind was the curious fact that
Secretary Summers did not write to my congressman.
Instead, he had underlings respond, so I wondered about
this conspicuous silence by Mr. Summers. Was the
Treasury Department chain of command being relied upon
(as Nixon had tried to rely upon the White House chain
of command) for a reason? Was there something Summers
knew about gold that his underlings didn't? If so, they
could write the letters to my congressman and believe
them to be truthful, while Summers knew otherwise. Was
I being disinformed by the Treasury Department?

About this time, Bill Murphy and his colleagues at the
Gold Anti-Trust Action Committee, who had already been
making tremendous strides in the Herculean task of
exposing the U.S. government's price manipulation in
the gold market, were also coming up with some
startling information, particularly as it relates to
the Exchange Stabilization Fund. The conclusion of some
of the reports released by GATA made my skepticism
about the absence of a reply from Secretary Summers
seem warranted.

After all, the ESF is under the direct control of only
two people, the treasury secretary and the president.
Did Secretary Summers' knowledge of the goings-on in
the secretive ESF explain why his underlings, and not
him, were writing the letters denying U.S. government
involvement within the gold market? Would he be fibbing
if his letter denied any involvement by the U.S.
government in the manipulation of the gold price
because as one of two people responsible for the ESF he
knew otherwise? Did he risk being caught if he did
write an untruthful letter?

Despite the denials coming from lower-level Treasury
officials, some eye-opening facts were now emerging as
a result of some brilliant investigating. See, for
example, Reg Howe's April 9, 2000 report, "The ESF and
Gold: Past as Prologue?," at
www.goldensextant.com/commentary10.html#anchor29922 [1].
These newly uncovered facts were starting to paint a
picture at odds with the U.S. government's

Reg's report reveals that unexplained losses were
appearing in the ESF's quarterly reports to Congress in
quarters when the gold price rose, while profits were
earned in quarters when the gold price fell. This
result was curious because there reportedly were no
interventions in the foreign exchange markets at the
time, and as Reg says, "There were no other obvious
activities that might explain [these] losses". So how
did these profits and losses arise if not from the gold
market? These financial results provided further
circumstantial evidence that the ESF was short gold,
presumably because it was intervening in the gold
market, but indisputable evidence of ESF activity was
still missing.

By way of background, the ESF was created subsequent to
the 1933 gold confiscation, and funded by the paper
profits arising from 1934 devaluation of the dollar
against gold, after which it took $35 instead of only
$20.67 to purchase one ounce of gold. The ESF was
established under the exclusive control of the
president and the treasury secretary. Being within the
exclusive domain of the executive branch, it operates
largely outside of congressional oversight. Because of
this inherent potential to operate as a loosely
supervised slush fund, many prominent people have long
recommended the ESF's dissolution.

The ESF is secretive, shrouded in mystery, and little
is known about it. Even its financial statement tells
us little. For example, the ESF balance sheet does not
show any gold asset. But this balance sheet is a
fiction anyway, and here's why.

For the latest available ESF financial statement,
please refer to www.fms.treas.gov/bulletin/b30esf.pdf [2].
The largest asset on the balance sheet, $15.8 billion,
is entitled Foreign Exchange and Securities, but
Footnote 2 to this asset says: "Excludes foreign
exchange transactions for future and spot delivery."

Think for a moment about the implications of this

If this asset excludes both future and spot delivery,
ALL foreign exchange transactions are therefore
excluded on the ESF's balance sheet. Therefore, the
total losses from these transactions can easily be
excluded as well, so long as the counterparty never
asks for delivery, which the ESF can no doubt easily
arrange. After all, who would question the
creditworthiness of the U.S. government and its ability
to deliver on its foreign exchange commitments?

This footnote is important for another reason. It also
makes possible gold transactions in the ESF because it
allows the possibility that they are not gold
transactions per se but rather an unreported foreign
exchange transaction. This sleight of hand is possible
because gold transactions are made against some
national currency. So the ESF can misleadingly report
these trades as foreign exchange transactions and not
gold transactions, but the ESF doesn't even need to
provide this minimal reporting because all foreign
exchange spot and forward transactions are excluded

In any case, given this background information and
facts, and much more which I have not included for the
sake of brevity, it should be clear why my skepticism
about the government's denials of involvement in the
gold market has been building. But I, GATA, Bill
Murphy, Reg Howe, and others leading this charge are
not alone. Increasing numbers of people have come to
doubt the honesty of government pronouncements claiming
no involvement with the gold market.

While the skepticism grows, so too has the search for
hard evidence. And I have now found the elusive smoking

I was doing some research and found irrefutable
evidence from the U.S. government's own public reports.
The first report is posted at the following website of
the Federal Reserve,
www.bog.frb.fed.us/releases/Bulletin/1000pg51.pdf [3], and
I refer to the August 2000 report.

This report prepared by the Federal Reserve shows the
U.S. reserve assets, and it specifically reports the
gold stock. Of interest is the description on this
entry. It says, "Gold stock, including Exchange
Stabilization Fund." The $11,089 million gold stock in
this report on December 31, 1999, is revealing for two

First, it reports a $40 million increase from the
November 1999 balance. Because this asset is booked at
the archaic $42.22 ounce price, this $40 million
increase represents approximately a 950,000-ounce jump
from November 30, 1999. Note that this asset then
declines by $41 million on January 31, 2000.

Second, to appreciate the importance of the movement in
this asset, the U.S. gold reserve in the above report
needs to be compared to the weight of gold on December
31, 1999, on the Federal Reserve's balance sheet. The
following URL shows the Fed's December 31, 1999 annual
www.federalreserve.gov/boarddocs/RptCongress/annual99/ann99.pdf [4]

Note that the Federal Reserve's December 31, 1999,
balance sheet shows a gold stock of only $11,048
million (see page no. 334), which is $41 million LESS
THAN the $11,089 million reported as the total U.S.
reserve assets. Again, at the $42.22 per ounce price at
which the asset is booked, approximately 1 million
ounces of gold is involved.

The important point is that there is gold in the U.S.
reserve assets report (which its footnote says includes
the ESF) that is not on the Federal Reserve's balance
sheet. So there is only one possible answer to this
discrepancy. This million ounces of gold must be a gold
transaction that was undertaken by the ESF. There is no
plausible alternative.

As already noted, there are letters coming to GATA and
others from the Treasury Department saying that there
is no intervention in the gold market by the ESF. So is
the Treasury Department lying?

Yes, the letters from Treasury are not truthful because
this approximately million-ounce year-end 1999 entry in
the U.S. Reserve Assets must be an ESF intervention in
the gold market. There is no other explanation.

First of all, any transaction of this size by any
government entity by definition has to be an
intervention. It's too large a transaction to be
anything else, given that gold is no longer used by
governments in settling accounts. Second, because the
gold is not included in the audited accounts of the
Federal Reserve, it is gold under the control of the

These two public reports of the ESF and the Federal
Reserve are the smoking gun. Despite the Treasury
Department denials, the ESF is indeed intervening in
the gold market. The comparison of the report of the
U.S. reserve assets to that of the Federal Reserve
proves it. But as spectacular as this discovery is,
there is even more startling and revealing news.

The following table shows: 1) the gold stock reported
on the Fed's year-end audited balance sheet; 2) the
gold stock in the U.S. reserve assets as reported by
the Fed; and 3) the difference between these two totals
in dollars and ounces.

1995 1996 1997 1998 1999

FRB year-end audit
$11,050 $11,048 $11,047 $11,046 $11,048

U.S. reserve assets
$11,050 $11,049 $11,050 $11,041 $11,089

Difference in $'s (mil)
$ (1) $ (3) $ 5 $ (41)

Diff. in oz's (thou)
(24) (71) 118 (971)

Note that while the gold in the U.S. reserve assets is
larger than the Fed's gold stock in most years, in 1998
the U.S. reserve assets WERE LESS THAN the gold stock
in the Fed. This means that the ESF on December 31,
1998, owed gold -- that is, it had a gold liability,
the net effect of which, when combined with the gold
stock of the Federal Reserve, reduced the total gold
stock reported in the U.S. reserve assets.

This revelation is important because it confirms the
discovery made by Reg Howe in his April 9, 2000 study,
which is referenced above. To quote from Reg's report:
"From October 1998 through the end of the year gold
prices remained weak and in declining mode, and the ESF
had one of its most profitable quarters."

Now we know why it was so profitable. The table above
shows that the ESF had a 118,000-ounce gold liability
on December 31, 1998. As we can see this weight of gold
on only one day, it is probably just the tip of the
iceberg. It seems logical that the ESF carried a short
position throughout all 92 days of what Reg describes
as "one of its most profitable quarters."

The above table is important for two other reasons.

First, it is clear that we are not talking here only
about a one-time intervention on December 31, 1999.
Instead, the above table proves that there has been ESF
activity since 1996, which is the second reason this
table is important. It was 1996 when gold broke below
$380, which was the event that provoked me into
investigating and eventually concluding that the
falling gold price was due to government intervention.

I now have the smoking gun to prove it.

Needless to say, I was elated by my discovery, but I
was also flabbergasted. Were the facts always right
there under my eyes, but not apparent until I started
comparing these two different reports? I kept asking
myself whether I was missing something. After
thoroughly researching my discovery a few times, my
conclusion seemed solid, but I decided to keep an open
mind about it until getting a second opinion. To do
this, I turned to a long-time friend, Reg Howe.

In addition to his research I reference above, Reg has
completed some brilliant research about the buildup in
gold derivative positions at the major bullion banks. I
highly recommend his web site, www.goldensextant.com [5],
where his research is posted.

Reg investigated my findings even more thoroughly than
I did. He delved into the old public records in
Harvard's library, comparing the differences between
the gold stock included in the U.S. reserve assets
report and the gold stock reported on the Federal
Reserve's balance sheet. In the end, Reg's work
corroborated mine. The difference between these two
reports can only be explained by ESF activity.

Reg and I subsequently met to discuss our notes. He
came up with what I believe to be a plausible reason to
explain why this activity by the ESF is being reported
by the Federal Reserve. It seems that one arm of
government at a very low level was reporting events
that other people at higher levels in another arm of
the government were denying ever happened.

If you have ever visited the gold vault buried deep
below the basement of the Federal Reserve Bank of New
York, you will see countless cubbies where the gold is
stored. Each of those cubbies is identified with a
unique number that corresponds with the owner of the
gold stored in it. One of those cubbies is owned by the
ESF. Reg suggested to me, and I agree with his thinking
in this regard, that apparently low-level Federal
Reserve staff have been dutifully recording movements
of gold into and out of that ESF cubby, and recording
them in the month-end reports of U.S. reserve assets,
probably unbeknownst to the Treasury officials who have
been denying any involvement by the ESF in the gold

I uncovered this smoking gun several weeks ago, but Reg
and I kept it to ourselves. Reg asked me to not
disclose it until he prepared and submitted the brief
for his lawsuit against the Bank for International
Settlements, and I of course agreed to his request.
Last week Reg filed his brief with the federal court in
Massachusetts, so I am now making this research public.

Like the investigations that pursued Nixon and Clinton
until the truth emerged, so too will the current
investigation of the gold market continue. It is self-
evident to anyone who understands gold that the whole
truth about the gold price over the past few years is
only now starting to emerge.

Those are bold words and some readers may no doubt be
questioning why the U.S. government would go to all this
trouble. What does it gain by manipulating the gold

The obvious answer is that gold is widely followed by
many as an indicator of inflation. If the gold price
were rising, worry about inflation would also rise.
Therefore, by manipulating the gold price to keep it
from rising, resurgent inflation can be made to appear
less troublesome.

There is some merit to this argument, particularly in
an environment where crude oil prices have nearly
trebled in two years and natural gas prices have
quadrupled in about eight months. But I think the
answer lies somewhere else. More is at stake here than
just the appearance of whether or not inflationary
pressures are building.

Ten years ago when the banking industry was going
through one of its periodic crises, the Federal Reserve
manipulated interest rates to the banks' benefit. The
Fed dropped short-term rates, while holding up medium-
term rates, widening the spread between these two
maturities to an unusual level. Banks then borrowed
short-term money at the resulting artificially low
rates and purchased medium-term government paper,
earning the spread. These induced profits were then
taken into the banks bottom line, helping them to
charge off their bad loans without significantly
impairing earnings. The banks were bailed-out.

In that environment, with banks frantic in their
efforts to widen spreads to re-build the balance sheet,
gold offered an attractive alternative. Why not borrow
gold at rates under 1 percent and buy government paper
earning more than 5 percent?

Because gold's natural interest rate is so low, gold
has always offered this possibility for profit,
provided the gold price did not rise. If the gold price
rose by more than the 4 percent interest rate
differential, the profits the banks hoped to earn would
become losses. Despite this risk, the banks began to
borrow gold from central banks, sell this gold into the
spot market for Dollars, and use these dollars to
purchase government paper. It was such a profitable
business that the banks -- as they are wont to do --
overdid it. When gold hit $416 in early 1996, I believe
the banks, staring at huge losses, panicked. They
recognized that they could never buy in the market the
weight of gold needed to cover their short position. So
the banks did what they always do when they get into
trouble -- they go straight to the U.S. government
looking for a bailout.

Given the intractable nature of this particular
problem, that the banks were short more than two times
the weight of gold mined each year, the usual bailout
practice of throwing taxpayer dollars at the banks
would not work. Unlike dollars, gold cannot be created
out of thin air. So the Treasury sent the ESF to the
rescue in 1996 to manipulate the gold price, presumably
forever, to prevent the banks from taking big losses.

So today the banks are again getting bailed out. Banks
are short gold, and the ESF is keeping the gold price
under control. Therefore, the banks do not have to
report big losses on their short gold positions, which
would obviously be the result if the gold price were
allowed to rise to its natural level in response to
freemarket forces of supply and demand.

Of course, not all banks are short gold. Many bankers
were wise enough not to get themselves into the
predicament of owing physical gold that they cannot
return to their lenders (that is, the central banks)
without causing the price to skyrocket. But those banks
who were foolish enough to get themselves stuck in this
predicament (that is, the big U.S. and European money-
center banks), do what the big banks always do when
they get into trouble. They go hat in hand to their
respective government and to that government's captive
central bank in order to get bailedout. It appears that
this time the bailout is occurring not just in the
United States. I believe that the Bank of England was
induced to make its peculiarly timed announcement by
the dire straits of one or more U.K. banks hopelessly
short bullion.

Throughout the 20th century governments have always
been manipulating the gold market; only the way they go
about it has changed. Until the gold standard was
abandoned in 1971, government's manipulated the gold
market by dishoarding gold. For example, the Johnson
administration dishoarded 300 million ounces at $35 per
ounce in a vain attempt to make the dollar look better.
Now governments manipulate the price surreptitiously
and covertly.

Sometimes our progress only comes after we take one
step forward, and two steps back. I feel that way at
the moment. While this new discovery about ESF activity
is definitely a step forward, we have also taken two
steps back because this new discovery calls into
question the previous assurances I received from the
Treasury Department that the gold in Fort Knox and the
other depositories is intact. I'm am doubtful now about
their assurances. Enough new evidence has emerged to
suggest that I was disinformed by the Treasury

So what's the next step? My only hope is that the above
information will contribute to the growing body of
research about the gold market and that it will help
lead to a quick admission by the treasury secretary or
the president that the gold price has indeed been
manipulated. Reg's lawsuit against the BIS may prove to
be an important step in that direction. And hopefully,
it will be the last step needed before the whole truth
is finally told.

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