You are here

South African gold mine strike averted at last minute

Section: Daily Dispatches

8:50p ET Tuesday, July 31, 2001

Dear Friend of GATA and Gold:

The Treasury Department has replied to GATA's latest
questions, through Sen. Joseph I. Lieberman, and the
answers are disappointing in the extreme.

Treasury's reply was dated July 13 and signed by John
M. Duncan, assistant secretary for legislative affairs.
Duncan writes that the U.S. government has undertaken no
gold swaps in the last 10 years. He declines to answer
GATA's questions about the reclassification of the U.S.
gold reserves at West Point. quot;These questions,quot; Duncan
writes, quot;have been referred to the Bureau of the Mint
for a direct response.quot;

As for GATA's desire to know what U.S. policy on gold
is, Duncan writes: quot;The Treasury Department will
continue to hold U.S. gold reserves and to value these
reserves at $42.2222 per ounce.quot;

If you believe that this response is the full extent of
the thinking of the U.S. government on gold, I'd like to
talk to you about buying a bridge in Brooklyn that I was
unable to sell to Reg Howe at lunch today.

Fortunately, as you'll see from his latest incisive
essay, attached here, Reg and his remarkable discovery
team have found more references to gold swaps in Federal
Reserve minutes.

The Fed does seem to talk a lot about these supposedly
only mythical creatures. GATA will continue the hunt
for them in the flesh, and, in this hunt, more letters
to members of Congress, seeking a full and candid
explanation of U.S. policy on gold, will be crucial.

Along these lines, a GATA supporter has just sent to
Kentucky Sen. Jim Bunning a letter that is so much to
the point that I must share it with you here, for it
shows what all of us have to do to try to engage our
members of Congress in the gold issue:

* * *

Dear Senator:

Forgive my not awaiting reply to earlier letters
(Attachments 1 and 2) on the gold scandal that is slowly
coming to light. I take seriously your inquiry into this
key matter, and want you to benefit from recent research
by recognized experts. With this in mind, I am enclosing
the essay, quot;What is Happening to America's Goldquot;
(Attachment 3), published by James Turk just last week.

As you read Mr. Turk's analysis, I ask you to consider
whether there is a giant coverup under way by those who
have mishandled our national gold stockpiles and now
seek to avoid detection. It is clear that the price of gold
has been manipulated by a few public and corporate
officials since the mid-90's. But it now also appears that
their chief tool has become the illicit selling (or
swapping) of U.S.-owned gold, and that records are being
altered to shield these transactions from Congress and the
public eye.

A possible added means of price manipulation is an
unapproved distribution of gold held by the International
Monetary Fund, which Congress explicitly vetoed two years

Thank you, in advance, for continuing to pursue this
critical issue.



* * *

Government officials can mislead and dissemble for a while
in response to our correspondence, but if we can engage a
few congressmen in the details and get some questions
asked at congressional hearings, such misleading will start
running risks. So let's keep at it.

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


Swapping Lies:
Fed and Treasury Officials Hanging Themselves

By Reginald H. Howe
August 1, 2001

Although the court case is not moving as swiftly toward
discovery as some had hoped, neither my discovery team
nor GATA's many supporters are remaining idle. Last
week two GATA stalwarts, Mike Bolser and Dave Walker,
working independently but for the common cause, came
across another official reference to gold swaps, this
time in the transcript of the minutes of the Federal
Open Market Committee on March 26, 1991:

a href=

This reference came at the end of a lengthy discussion
(pp. 8-21) concerning U.S. foreign exchange reserves,
which are held in approximately equal portions by the
Fed and the Exchange Stabilization Fund. The discussion
began with a presentation by Samuel Cross, Manager for
Foreign Operations, System Open Market Account, of the
pros and cons of holding significant foreign exchange
balances. On the negative side, Mr. Cross cited
exchange rate risk, including unrealized but reportable
losses on marking these positions to market in the
Fed's financial statements.

Addressing this problem, Chairman Alan Greenspan asked
(p. 17): quot;Is there not any mechanism by which we can
create swaps or RPs or something of that nature in
which essentially we have fixed the exchange rate of
our holdings?quot;

In response, former Fed governor Wayne Angell suggested
(p. 18): quot;You could have an exchange of puts. In
effect, you could swap puts and thereby assume that
somebody would ultimately want to exercise that added
advantage.quot; Mr. Cross then observed (id.): quot;It sounds
like a forward exchange transaction.quot;

But that is not precisely what Mr. Greenspan had in
mind. He replied (id.):

quot;Well, the point at issue is that it's a [forward]
exchange transaction that has a date on it. ... And
effectively that gets factored into the market and
neutralizes your position. What I'm thinking of -- and
I just thought of it at this moment, so there might be
plenty of reasons why not -- is an open-ended fixed-
price mutual put, to put it in the terms that Governor
Angell stipulated, so that we can eliminate part of the
problem that is on the negative side of the current
--quot; [sic, end of paragraph].

Then, just before the FOMC moved to the next topic on
its agenda, Mr. Angell added (p. 19):

quot;There's one slight addendum to this discussion: We
have a reserve holding that costs us more money than
what is reasonably in prospect to happen on foreign
exchange rates and that is that we really are not a
small reserve holding currency country. I think we
actually have official reserves of $85 billion, Sam,
compared to Taiwan's $75 billion. And if you mark our
gold to the $358 price, we end up with something like
$170 billion. There are opportunity costs because we
don't get interest on that gold as we do on our foreign
exchange [holdings]. That cost is out there also. I
would hesitate for us to have foreign currency holdings
that have swap puts that just sit there, [which] is now
becoming the case for our gold.quot;

What are the quot;swap puts that just sit therequot; on the
U.S. gold reserves? Certainly contracting parties could
exchange or swap puts in the manner suggested by Mr.
Angell. For example, a foreign central bank might
receive the right to put a certain amount of its dollar
holdings to the United States for gold at a specified
price, in exchange for which the United States would
receive the right to put an equal amount of its gold to
the foreign central bank at the same price. In effect,
the foreign central bank would obtain a call or option
to buy gold, and the United States an option to sell
gold, both at the same fixed price.

However, taken in the context of the entire discussion,
the swap puts on gold appear to be something different.

Although I am not aware of any instance in which the
words quot;swap putquot; have been used together as a noun,
many exotic derivatives have been created in the over-
the-counter market. Accordingly, the term may designate
a special instrument designed for the Treasury, the
Fed, or the ESF. While the term might in a colloquial
sense be used to describe the unwound side of an
existing swap, this usage would make a lot more sense
if the swap possessed some sort of roll-over provision
or, better yet, option not to unwind. In the latter
event, exercise of the option would quot;putquot; or quot;stickquot;
the swap to the other party by converting it into a
completed sale.

For example, the United States might enter into a swap
of gold against U.S. debt securities with a U.S.
bullion bank at, say, $350/oz. Rather than take the
physical gold out of U.S. reserves, the bank might use
it either to hedge gold borrowings from other sources
or in a location swap with another large holder. But if
the bank had an option under defined conditions to
convert the swap into an outright sale of U.S. gold
rather than a mere time-limited exchange, one might
think of the arrangement a quot;swap putquot; or a swap with a
put option attached. Like the previous example, this
transaction would facilitate gold lending by central
banks to bullion banks as well as encourage and support
the use of derivatives by bullion banks to suppress
gold prices.

However ambiguous their precise nature, certain
attributes of Mr. Angell's quot;swap putsquot; appear quite
clear: 1) they attached to quot;our gold,quot; meaning the
official U.S. gold reserves; 2) they were in 1991 part
of an existing and growing program as encompassed in
his expression quot;now becoming the casequot;; and 3) they
must either have been of long maturity or possessed
rollover provisions because otherwise they would not
quot;just sit there.quot;

Since his departure from its board of governors, Mr.
Angell has stated more than once during appearances on
financial TV programs that the Fed has quot;precise
controlquot; over the price of gold. His 1991 comments to
the FOMC open a window on just how this control is

What is more, it appears, and pretrial discovery will
likely confirm, that these swap puts were indeed the
gold swaps cited by the Fed's general counsel, J.
Virgil Mattingly, in his 1995 statement to the FOMC :


quot;It's pretty clear that these ESF operations are
authorized. I don't think there is a legal problem in
terms of the authority. The statute [31 U.S.C. s. 5302]
is very broadly worded in terms of words like 'credit'
-- it has covered things like the gold swaps -- and it
confers broad authority.quot;

Thanks to the work of Mr. and Mrs. Rupert C. Raymond,
two GATA supporters from Kentucky, their senator, Jim
Bunning, released a memorandum from Mr. Mattingly to
Chairman Greenspan dated June 8, 2001, in which the
Fed's general counsel says in relevant part:

quot;I have no clear recollection of exactly what I said
that day but I can confirm that I have no knowledge of
any 'gold swaps' by either the Federal Reserve or the
ESF.quot; In an article entitled quot;GATA's smoking gun has
real smoke,quot; Tim Wood of so
effectively undermines Mr. Mattingly's disavowal of his
prior recorded statement that I have little to add.
What should most concern officials at the Treasury and
the Fed is that Wood, an outspoken skeptic of GATA, has
nonetheless kept an open mind as good journalists do,
suggesting that official denials of U.S. interference
in the gold market are beginning to wear pretty thin
with knowledgeable observers.

Last October, the European Central Bank issued a paper
entitled quot;Statistical Treatment of the Eurosystem's
International Reserves. Part IV of this document
contains an appendix with numerical examples
illustrating how euro-area central banks should account
for these transactions. The examples include three
different types of gold transactions: 1) the purchase
of 20,000 ounces from the Bank of England; 2) a one-
month gold deposit of 10,000 ounces with J. P. Morgan
in New York against U.S. government securities as
collateral; and 3) a quot;gold swap with the United States
Federal Reservequot; in which the euro-area central bank
swaps 1000 ounces of gold against US$300,000 in
currency, with the transaction to be reversed one month
later quot;at the spot price of gold prevailing in the
market at that moment.quot;

The first two examples involve common transactions that
are completely consistent with the known activities of
the postulated counterparties. The Bank of England is
selling gold. Morgan borrows gold, or takes gold
deposits, which is fundamentally the same thing. A
number of central banks outside the euro area engage in
gold swaps. If, as Chairman Greenspan and Mr. Mattingly
insist, the Fed never does so, either for itself or on
behalf of the Treasury or the ESF, why did the ECB
select the Fed as the hypothetical counterparty in its
third example? It hardly seems likely that the ECB
would choose for this example a counterparty with which
no euro-area central bank had done a gold swap. On the
contrary, the implication from the first two examples
is that the Fed is the counterparty on a significant
portion of the euro area's total gold swaps.

Like his predecessor Lawrence Summers, Treasury
Secretary Paul O'Neill -- eschewing personal
responsibility -- delegates to underlings with no
authority to speak for the ESF the task of denying any
involvement by it in the gold market.

In a letter dated July 16, 2001, to GATA's Chris
Powell, Sen. Joe Lieberman passed along answers from
John M. Duncan, the Treasury's assistant secretary for
legislative affairs, to questions Chris had promulgated
(a href= The
two questions and answers of most interest and
relevance are:

1) What are the quot;gold swapsquot; cited in the minutes of
the January 31, 1995, meeting of the Federal Open
Market Committee?

Mr. Duncan's Response: quot;Treasury is not a member of the
Federal Open Market Committee, and therefore no
Treasury representative was present. Mr. Powell may
wish to address this question to the Federal Reserve.quot;

2) What quot;gold swapsquot; have been made by the ESF, the
Treasury Department, or the Federal Reserve in the last
10 years? Whose gold was involved? What other parties
were involved? What is the status of these quot;gold

Mr. Duncan's response: quot;There have been no gold swaps
in the last 10 years.quot;

As evidence of U.S. participation in gold swaps
accumulates, so do official denials of their existence.
What thus emerges is a very disturbing picture: a
decade of secret gold swaps starting prior to the
Clinton administration and involving top officials from
both major parties.

The Anglo-American war against gold is being concealed
from the American people by a bipartisan program of
swapping lies -- first by Fed and Treasury officials
with each other and then to members of Congress, who
pass them along to their constituents. This procedure
enables top government officials to avoid giving false
public testimony before Congress while at the same time
allowing the people's elected representatives to appear
to be doing their jobs. But this stratagem
notwithstanding, what official Washington wants to
cover up may soon emerge as the greatest financial and
political scandal in U.S history.