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Is leased gold actually still in central bank vaults? An exchange

Section: Daily Dispatches

1:10a ET Sunday, July 28, 2013

Dear Friend of GATA and Gold:

Our friend J.S. writes:

"I've been reading your work for several years and I have a question and think that your reply might interest your larger audience as well, so I invite you to address such as a dispatch.

"I've been following James G. Rickards, with whom I'm sure you're familiar. He long has claimed that government-leased gold doesn't actually travel anywhere and that possession transfers only on accounting ledgers. So he believes that the bullion banks, not governments, will be the ones left without chairs when the music stops playing. I'll excerpt the following two typical paragraphs from a recent interview he gave at Money Morning:

"'People don't understand leasing,' he adds. 'They somehow think that if the federal government leases gold to JPMorgan, JPMorgan backs up a truck and drives away. That is not what happens. The gold stays where it is. The gold doesn't go anywhere. The gold's in Fort Knox, the gold's at West Point, the gold's at the Federal Reserve. ...

... Dispatch continues below ...


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"'So the banks are going to be the ones that come up short. Because, remember, it never left the vaults. If I'm the Fed, or I'm the Treasury, and I've leased my gold to you and I call it back, and you can't deliver to me, you can't honor the contract, I'll just terminate the contract, keep the gold, reconvert title to my name, and send you a bill.'

"Rickards' contentions ring true for me. Because if we're living in a world in which paper promises ubiquitously substitute for actual bullion, then why not just begin such accounting charades back in the original vaults and save everyone involved the moving expense and hassle?

"So how exactly, I wonder, does GATA understand this? Do GATA's claims that Western government reserves have long been loaned, leased, and/or sold into the market necessarily preclude the possibility that such gold nonetheless remains stacked within Western government vaults?

"I've sometimes read things in which GATA appears to agree with Rickards, such as the August 3, 2012, dispatch titled, 'Treasury Audits NY Fed's Gold but Only to Evade Leasing, Swapping, Oversubscription Issues' --

-- which argues that actual gold may exist within Fed vaults but that 'ownership' is another question entirely. But many other times GATA appears to argue that the vaults are actually and literally empty.

"Any perspective you can give will be welcome."

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Dear J.S.:

GATA has great respect for Jim Rickards, and since he gained a U.S. government security clearance, we always have figured that he is wired pretty closely to certain intelligence sources. We are much obliged to him for having spoken at GATA's conference in London in August 2011. He has given enormous credibility to complaints that Western central banks manipulate the gold market. For example:

Rickards is always worth listening to very carefully.

While I don't think he has ever specified any authority for his description of how the U.S. government leases gold -- an undertaking the government has never acknowledged publicly as far as I know -- he is a lawyer and worked closely with the government in the rescue of the Long-Term Capital Management hedge fund in 1998, so he surely has been told things the public isn't allowed to know and it wouldn't surprise me if some gold leasing operates as he describes, with the gold never leaving the central bank vault.

But if and when gold leasing works that way, it would be an even bigger fraud, creating various layers of imaginary gold throughout the world financial system and essentially giving bullion banks a government license to become creators and beneficiaries of infinite money.

The rise of the gold price from 2000-2010 despite constant announcements of central bank gold sales during that time led me to believe that those supposed gold sales were not really transfers of gold into the market but actually just cancellations -- cash settlements -- of leases of central bank metal that had hit the market years earlier, from about 1995 onward, when the gold price went steadily down --

-- and that this gold could not be recovered for the central banks that lent it without rocketing the market price upward and crashing the currency markets.

It has seemed to me that to drive the gold price down so steadily in the 1990s, some of the gold leased then must have been real, must have left central bank vaults, and must have hit the market.

This is just my speculation; I don't know. Unlike Rickards I have no government security clearance and have never worked confidentially with any government agency. (No matter -- when you're trying to bring transparency to the gold market, any day not spent at Guantanamo is a good day.) But I think my speculation is supported by the secret March 1999 staff report of the International Monetary Fund, which said that Western central bank members of the IMF freaked out at and rejected the staff's proposal to impose honest accounting on gold reserves by requiring central banks to disclose gold loans and swaps:

If all their gold was really still in the vault, why the desperation of the central banks to avoid honest accounting?

Of course Rickards could be exactly right that the U.S. gold reserve is firmly in place even as vast amounts of foreign central bank gold said to be vaulted at the Federal Reserve Bank of New York has been dissipated in leasing operations directed by those central banks or by the U.S. government without their approval. The U.S. government's expropriation of custodial gold for leases and swaps is clearly the implication of the German Bundesbank's announcement this year that it will retrieve only 20 percent of its gold vaulted at the New York Fed and only after seven years.

In any case does it matter much whether what seems to be a gold shortage arises from the emptiness of central bank vaults or from the inability of central bank agents, the bullion banks, to cover their shorts? For either way there would seem to be a catastrophic problem.

If the central bank gold vaults are empty and this is disclosed and the central banks are shown to have been lying all along and essentially delegating money creation to a few favored financial institutions for private profit, confidence in central banking would be destroyed.

And if the bullion banks -- JPMorganChase, HSBC, and the rest, some of the biggest banks -- defaulted on their gold contracts because they never really had possession of the gold they sold, they would be exposed as grotesquely crooked and there would be a similar collapse of confidence. The failure of some "too big to fail" banks might be averted by their invocation of "force majeure," but that in turn could cause the failure of their counterparties and risk a chain of collapse of financial institutions like the one started by the failure of the Creditanstalt bank in Vienna in 1931.

Then central banks likely would intervene frantically all over the place and try to bail out everybody who was short gold. But word would be out that "paper gold" was ridiculously oversubscribed. What becomes of the price of gold when the world realizes that 80 or 90 percent of the investment gold it thought it owned is imaginary?

Of course it might be best if all central banks as currently operated were swept away at last and replaced with some more honest, accountable, transparent, democratic, and free-market-based monetary system. Fiat justitia et ruant coeli. GATA is doing what it can.

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

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