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Midas commentary for April 22, 2001

Section: Daily Dispatches

* * *

There you have it. The ESF doesn't have to notify
Congress about anything in advance. It is under the
sole authority of the secretary of the treasury and the
president, and they can do quot;gold swapsquot; without any
congressional approval, which brings up an important
point I made in quot;The Smoking Gun.quot;

I had noted a curious pattern in the correspondence
emanating from the Treasury Department. The secretary
of the Treasury never answered any questioning letters
concerning the ESF, even if they were written directly
to him. Rather, one of his assistants invariably
responded. I therefore wondered whether the Treasury
Department chain of command was being relied upon just
as President Nixon had tried to rely upon the White
House chain of command in an attempt to avoid being
sucked into the vortex of a growing Watergate scandal.

I even asked in quot;The Smoking Gunquot;: quot;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?quot;

The above excerpts from the FOMC transcript clearly
establish that my question needs answering.

It is becoming clear as more and more evidence emerges
that the secretary of the treasury does not answer
questions concerning the ESF because he, but not his
underlings, knows to what extent the ESF is engaged in
gold-related activity. His underlings can say that the
ESF is not involved in the gold market because, as far
as they know, what they say is true.

However, we now have proof that the ESF is indeed
involved in the gold market. So the secretary of the
treasury does not respond to letters asking questions
about the ESF and its activity in the gold market. He
cant answer them truthfully without spilling the
beans. He obviously knows everything about what really
is going on within the ESF, in contrast to his
underlings. Or at least most underlings because it
appears that one of them is in there up to his elbows
washing ESF laundry. His name is Ted Truman.

From the FOMC transcripts it is quite apparent that
Truman has a special role. Though recorded in the
attendee list in the FOMC transcripts under the
featureless title of quot;economist,quot; he has a role that is
anything but ordinary. The transcripts reveal that he
clearly speaks for the Treasury Department in FOMC
meetings and is very knowledgeable about the ESF. The
insight displayed by him in the FOMC minutes makes it
clear that he is not just fully informed about the ESF
and its operations, but that he probably is also
intimately involved in ESF decision making.
Consequently, the following excerpt is particularly

* * *

MR. PARRY. What is the size of the ESF?

MR. TRUMAN. The usable funds in the ESF today, counting
the foreign exchange as usable, amount to roughly $25

MR. PARRY. Can you say how it is broken down?

MR. TRUMAN. About $5 billion is invested in Treasury
securities and the balance is roughly equally divided
between marks and yen. I think they have slightly more
yen than marks.

MR. PARRY. Thank you.

MR. BOEHNE. Is any of it obligated in any way beyond
what we are talking about with Mexico?

MR. TRUMAN. It is obligated only in the sense that they
have one other swap arrangement with the Bundesbank.

* * *

Wouldn't it be interesting to know what this swap
arrangement with the Bundesbank entailed? What is the
nature of this swap? Is it a dollar/deutschemark swap
facility? Or is something else being swapped, like gold

Gold being swapped with the Bundesbank? It's an
outrageous thought.

Or is it?

I have already established that the ESF is very much
involved with gold. The only thing I haven't
established is with whom the ESF has those gold swaps
that Virgil Mattingly was talking about.

Let's put 1 and 1 together here to see if we can come
up with an answer.

According to Mattingly, the ESF has authorized gold
swaps, presumably in the recent past (circa 1995).
According to Ted Truman, the only outstanding swap
facility of the ESF (circa 1995) other than the one
established for Mexico is the ESF's facility with the

Therefore, the ESF has a gold swap facility with the

It's an interesting proposition, and one that fits well
with another newly discovered fact. Some very
interesting sleuthing by Mike Bolser, who has been
assisting Reg Howe in his lawsuit against the Bank for
International Settlements, has revealed that the
Treasury has made a small but very significant
accounting change.

Mike noticed that the Treasury Department has changed
the designation of nearly 1,700 tonnes of inventoried
gold at the U.S. Mints facility in West Point, N.Y.,
which is approximately 21 percent of the total U.S.
gold reserve, from quot;Gold Bullion Reservequot; to quot;Custodial

The August 2000 Status Report on U.S. Treasury-Owned
Gold stored at West Point has a designation of quot;Gold
Bullion Reserve.quot;

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But the September 2000 and subsequent status reports
inexplicably designate this same gold that is stored at
the U.S. Mint at West Point as quot;Custodial Gold.quot;

See a href=

This change was made without explanation, so rather
than let the matter remain unexplained, Mike diligently
contacted the Treasury asking what seemingly are two
uncomplicated questions. Would the Treasury please
explain why they made this change, and what does this
change in designation mean with respect to the
ownership status of the gold at West Point?

They are simple questions, but perhaps they touch too
close to a nerve. Not surprisingly, the Treasury so far
has not responded to Mike.

I have some views on what Mike discovered, and why the
Treasury is so quiet about it. I think this change in
asset classification is related to the ESF gold swaps.
Heres my thinking.

The change Mike spotted possibly occurred as a result
of accountants looking at the financial statements of
the U.S. Mint being prepared for its annual report
ending fiscal year 2000. Note that the previous
director of the Mint (Phillip Diehl) resigned in early
2000, so this was the first annual report signed by the
new director (Jay Johnson).

If there is one thing that government bureaucrats do
well, they take great pains to call things by their
right name. To do otherwise would put their job in
jeopardy if something under their responsibility came
under congressional scrutiny, and it was subsequently
determined that the name assigned to something was
incorrect or misleading.

Therefore, this change in the descriptive label for
nearly 1,700 tonnes of gold at West Point from quot;Gold
Bullion Reservequot; to quot;Custodial Goldquot; was purposeful. It
happened for a reason. This conclusion is all the more
plausible because the Treasury did not change the
classification from quot;Gold Bullion Reservequot; to
quot;Custodial Goldquot; to describe the gold stored in Fort
Knox or at the U.S. Mint at Denver. Maybe new U.S. Mint
Director Johnson saw something he didn't like. What
could that have been?

I have already put 1 and 1 together to establish that
the ESF has quot;gold swapsquot; with the Bundesbank. It
therefore does not require much conjecture to add one
supposition to the equation by concluding that the gold
at West Point has been swapped with gold owned by the
Bundesbank, thereby necessitating its reclassification
from quot;Gold Bullion Reservequot; to quot;Custodial Gold.quot; Here's
what I think has happened.

The Treasury Department wanted to make gold available
to some bullion banks. This statement is based on my
premise that several of the big banks have gold books
that are hopelessly imbalanced. By having borrowed
short and loaned long, these banks have in their quest
for profits imprudently fallen into the alluring but
usually fatal banker's deathtrap -- a mismatched loan
book. But what's worse for these banks, it is even more
difficult and treacherous to try extricating themselves
from this particular deathtrap because they haven't
mismatched their loan book of dollars, which we all
know can be created by the Federal Reserve out of thin
air if dollars are needed to bail out banks from a
deathtrap predicament.

Instead, these banks have mismatched their gold book.
And no one -- not even the Federal Reserve -- can
create gold out of thin air.

So given this reality about the nature of gold, the
Treasury Department had to turn elsewhere to find the
gold necessary 1) to keep these banks from defaulting
on their bullion obligations arising from their
mismatched gold books in an environment where metal had
become increasingly difficult to come by, and/or 2) to
keep the gold price low so that the likelihood of
default by the banks would be lessened, even though
metal would remain tight because fabrication year after
year was exceeding newly mined supply.

Rather than accept the bitter pill that certain banks
were about to default on their bullion obligations, the
Treasury Department looked for alternatives and found
one -- they put their hand into the till, until
recently known as the Gold Bullion Reserve at West
Point. They swapped this gold with the Bundesbank.

I'll explain how they did it, but let's first consider
the practical aspects of this transaction.

In all likelihood these particular bullion banks needed
gold in Europe, where their obligations were originally
established. There is very little gold lending in New
York. It is a practical problem to ship the gold out of
West Point without raising the alarm of government
auditors. It is costly too. Also, it is likely that
some of the gold in West Point is coin-melt from the
1933 gold confiscation. Even if it could be smuggled
out of the West Point vault into the market without
raising suspicions, the alarm bells would go off at the
refiner and soon thereafter in the market because
everyone knows that only the U.S. government has coin-
melt bars.

The appearance of coin-melt bars in the market would
immediately raise suspicions that the U.S. Gold Reserve
was being dishoarded, an outcome that the Treasury
Department would obviously take steps to avoid in
concocting its scheme because the U.S. Gold Reserve
cannot be depleted without congressional approval.

So one is faced with the practical considerations of
overcoming these hurdles, but the answer is relatively

The Treasury has gold at West Point. The Bundesbank has
gold in Europe. The Treasury cannot directly do a deal
with the Bundesbank because, unlike the ESF, the
Treasury is subject to congressional oversight. So
instead the secretary of the treasury and the president
decide to use the ESF to set up a swap line for gold
with the Bundesbank.

By so doing, the gold in the Bundesbank's vault in
Europe becomes ESF gold, to do with as they please --
that is, the ESF lends this metal to bail out certain
bullion banks. And the Bundesbank now owns the gold at
West Point, which as a result was purposefully
reclassified from Gold Bullion Reserve to Custodial
Gold because the Treasury no longer owns this gold,
having swapped it out through the ESF in exchange for
gold in Europe owned by the Bundesbank.

Case closed. The mystery of the abnormally low gold
price is solved. The ESF did it.

The abnormally low gold price is the result of the
proof that the ESF is deeply involved in the gold
market. The ESF is involved in some 1,700 tonnes worth,
because that is the weight of gold stored in West
Point, which was probably being swapped at the rate of
a few hundred tonnes per year from circa 1995 through

There are two other tidbits that I would like to share
with you that add even more validity to this

First, a couple of months ago I was analyzing the 1998
and 1999 balance sheets of the ESF. As a former banker,
I know a little bit about accounting, including where
to find the big holes through which the proverbial
truck can be driven. And I found one that could suggest
that in these two years 975 tonnes of gold came into
the market from the ESF.

After reaching this conclusion, I wanted to test it. So
I called a top gold market expert whose supply/demand
analyses are second to none and who believes that gold
from the U.S. reserves has been coming into the market
for several years.

Without telling him about my analysis of the ESF
balance sheet, I asked him how much gold he thought
came out of the Treasury/ESF in 1998 and 1999 in total.
His response was 1,000 tonnes, a mere 25 tonnes
difference from what I had deduced from the ESF
financial statements. When I told him that we had
reached the same conclusion from different sources, he
chuckled but was not in the least bit surprised, being
so convinced that the Treasury/ESF has been a major
source of metal for years.

I have thoroughly reviewed his supply/demand numbers
since 1994 and have determined that as much as 2,000
tonnes of gold from the U.S. gold reserve may have
entered the market in order to make the gold price as
low as it is, which leads me to the second tidbit that
I would like to share with you. It is just as

This same individual told me several months ago about
some astonishing intelligence he had learned from a
source in Europe. He told me that the Bundesbanks gold
vault was empty, which seemed so preposterous that I
found it hard to believe. He also admitted that this
news startled him and that he did not have an adequate
explanation for it. He knew that the Bundesbank was an
active lender of gold, but he had a difficult time
accepting the possibility that all 3,400 tonnes that it
owned had been loaned. Yet he was confident that his
source had provided him with accurate information.

We now know what has happened. The Bundesbank has
loaned 1,700 tonnes, half its 3,400 tonnes reserve; the
other 1,700 tonnes were swapped for gold in the U.S.
reserves, requiring the change in the West Point vault
from Gold Bullion Reserve to Custodial Gold.

In other words, the Bundesbank's vault is empty because
half its gold is stored at West Point, not Europe, and
the other half has been loaned out.

Despite the proof that the ESF is involved in the gold
market, two questions remain unanswered.

First, what is the ESF's motive?

Unfortunately, we just don't know for certain.

Many, including me, believe that it is to use gold to
provide the liquidity needed to bail out some big banks
that have imprudently grown their gold books by
expanding credit and mismatching their asset/liability
maturities. These banks are the ones with the unusual
-- some say abnormal -- derivative activities that are
named as co-defendants in Reg Howe's suit against the
BIS. That this list includes Germany's largest bank may
explain why the Bundesbank would agree to participate
in this gold-swap scheme. It was bailing out one of its

Others believe that the ESF aims to manipulate the gold
price to make inflation numbers look better than they
really are, keeping the gold price artificially low.
And there are some who argue that the U.S. government,
acting at the behest and under the instructions of the
big banks, aims to destroy their combined arch enemy --
gold, even though the gold mining industry would be
destroyed along with it.

This last theory is not outlandish. It has currency
because gold is the only free-market money. In contrast
to national currencies, all of which circulate only
because of government fiat, gold derives its value from
everyone who understands that it has usefulness as
money. And governments and banks don't like that while
they can manipulate gold for a time -- and as have we
have seen in recent years, even a long time -- they
cannot in the end control the price of gold any more
than they can control the price of a Picasso painting.

The value of a Picasso is determined by the free
market, and so too is gold. In short, you and I give
gold its value -- not the central banks, not the U.S.
government, and not any other government, either acting
alone or together. But the U.S. government either has
not yet learned or refuses to admit that its power to
control gold is limited, which is an inexplicable
conclusion unless you accept the notion that
governments have short memories and need to relearn
what they should have learned from experience.

If logic prevailed, the U.S. government would have
learned from its ill-fated attempt in the 1960s to keep
the price of gold abnormally cheap at $35 per ounce
that the market determines gold's value. But instead
the U.S. government is about to learn that it cannot
keep a manipulated floating-rate gold price from rising
any more than it was able to keep the manipulated
fixed-rate gold price from rising 30 years ago. The
free-market rate of exchange between dollars and gold
will prevail, eventually repeating what happened in the
1970s after the artificially low $35 rate was no longer
tenable -- the gold price will skyrocket higher. It is
well worthwhile keeping in mind that the gold price
rose nearly three-fold in the 18 months after the
fixed-rate price was abandoned in August 1971.

Then there is the second question. To what extent is
today's exceptionally low gold price the responsibility
of certain bullion banks, which have cheapened gold by
extending gold credit to such an extreme, and the ESF,
by perpetuating this scheme?

This question too does not have an answer, at least not
yet. But as the truth about the ESF's involvement in
the gold market continues to emerge and become more
widely known, the price of gold is destined to rise to
a more normal level, just as it did after August 1971.
The high price that gold eventually achieves will
indicate how badly certain bullion banks and the ESF
have damaged gold mining companies and the gold

In conclusion, while we don't know whether any of these
motives for manipulating the gold price that I ascribe
to the US government are accurate, one point is clear
and cannot be denied. The U.S. government cannot claim
that the ESF is not involved with gold. We now have the
proof. We know this because of our peek behind closed