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Very unusual and promising gold market trading action
7p ET Monday, January 14, 2002
Dear Friend of GATA and Gold:
Here's making it easy for you to get in touch with
Congress about the manipulation of the gold
I'm appending a sample letter that U.S. citizens
can send to their U.S. representative and U.S.
senators, asking for help in making the Federal
Reserve and the Treasury Department confront
GATA consultant James Turk's latest findings.
The letter is followed by the text of Turk's January
7 essay, quot;Accounting for the ESF's Gold Swaps.quot;
To identify your U.S. representative and senators
and get their addresses, go here on the Internet:
Then type your ZIP code in the box at the top left
of the screen and click on quot;GO.quot;
GATA supporters outside the United States can
adapt the letter for use with their own
elected representatives, and ask that their
governments make urgent inquiry with the U.S.
government about Turk's findings.
Please help the gold cause this way, and let us
know of any response.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Dear Representative/Senator ------:
I'm enclosing a copy of a new essay by James
Turk of The Freemarket Gold and Money Report,
quot;Accounting for the ESF's Gold Swaps,quot; that
discloses more details about the U.S.
government's surreptitious intervention in
the gold market.
Having studied government financial reports,
Turk has found that the U.S. government has
incurred a $20 billion liability in gold,
apparently by underwriting gold leasing by a
foreign central bank. The purpose of this
enterprise seems to be to deceive the
financial markets about the strength of the
dollar, the U.S. economy, and the true rate
of inflation. The price has been to put U.S.
gold reserves at risk without the knowledge
of Congress and the public.
Could you submit Turk's essay to the Treasury
Department and the Federal Reserve and ask
for a complete and candid response, detailing
where he is right and wrong?
Thanks for your help.
* * *
Accounting for the ESF's Gold Swaps
By James Turk
Copyright 2002, The Freemarket Gold amp; Money Report
Letter No. 297
January 7, 2002
A few weeks ago I received an interesting email from
Andrew Hepburn. He is a diligent researcher who has
done yeoman's work for the Gold Anti-Trust Action
Committee Inc., an organization formed to find the
truth about who is keeping a lid on the gold price.
Andrew and I recently have been sharing information and
research on a number of matters, and he brought to my
attention an intriguing footnote in a 1997 report
called the quot;Consolidated Financial Statements of the
U.S. Government,quot; or CFS.
The federal government completes the CFS annually. The
CFS started being prepared, as I recall, about 15 years
ago in an attempt to measure what the U.S. government's
true financial picture looked like according to
Generally Accepted Accounting Principles. As readers
may know, the U.S. government does not use GAAP in its
accounting. So Congress asked the General Accounting
Office (GAO) to begin preparing an annual CFS that
would provide accurate GAAP reporting of the U.S.
government's financial accounts. These reports were to
be prepared and dated as of September 30, which is the
government's fiscal year-end.
I hadn't looked at the CFS for a number of years
because they were not very detailed, and also because
they included some major errors in accounting. For
example, the CFS booked the U.S. gold stock as an asset
at its market value, but recorded only the
corresponding liability for U.S. Treasury gold
certificates at $42.22 per ounce.
This difference of course overstated the government's
true net worth, or, I should say, net deficit. For
according to GAAP, the U.S. government has a negative
net worth -- negative $5 trillion in 1997 and negative
$5.9 trillion in 2000. So this misreporting of the gold
stock seemed to be a clear attempt to minimize this
deficit net worth to make the government's financial
picture look better than it really was. As a
consequence, I never paid much attention to the CFS
until Andrew brought Footnote 2 of the 1997 CFS to my
attention. It reported an interesting accounting
In 1997 the CFS began valuing the U.S. gold reserve at
$42.22 instead of market value, which I think is a
significant change for two reasons.
1) This change reduced the U.S. government's net worth
by the difference between the market value of the asset
and the government's liability -- that is, the U.S.
Treasury gold gertificates. Given that the U.S.
government has a multi-trillion dollar NEGATIVE net
worth, there must be a very good reason for the
government to make that negative net worth even bigger
in the CFS. This good reason is the second point.
2) This accounting change -- made presumably because of
GAAP rules -- gives substance to the argument that as
of September 30, 1997, the U.S. Treasury owed 261.7
million ounces of gold to the Federal Reserve, and not
In other words, this accounting change made clear that
the Treasury owes the entire U.S. gold stock to the
This meaningful change in the quest for accurate
accounting by the GAO really spurred my interest. The
Federal Financial Management Act of 1994 apparently was
having a positive impact on the accuracy of the CFS
reports. So I thereupon began reading the CFS for
recent years, and particularly the footnotes. One can
learn a lot by reading the footnotes to financial
statements, comparing them from one year to the next
and then studying any changes. And there were indeed
several interesting changes.
1) Beginning in 1997, the following statement was added
to Footnote 2: quot;Gold has been pledged as collateral for
gold certificates issued to the Federal Reserve banks
totaling $11.0 billion.quot; As explained above, this
change is a significant advancement, and points to the
more accurate reporting being required by the GAO.
2) One other improvement for accuracy was made in 1997.
The CFS began some basic reporting on the Exchange
Stabilization Fund (ESF) by recording some of its
liabilities. The report said that the quot;Exchange
Stabilization Fund includes SDR certificates issued to
the Federal Reserve banks and allocations from the
International Monetary Fund.quot; That liability was $15.9
billion in 1997.
3) These weren't the only changes. The CFS more than
doubled in length from 32 pages in 1995 to 68 pages by
1997, then jumping to 94 pages in 1998, 111 pages in
1999, and 142 pages in 2000.
4) Curious changes weren't happening just to the CFS.
Spurred by what I was learning from the CFS, I began
looking at the annual reports of the Federal Reserve.
The 1998 annual report included a new footnote in a
section entitled quot;Significant Accounting Policiesquot; that
states: quot;The Secretary of the Treasury is authorized to
issue gold certificates to the Reserve Banks to
monetize gold held by the U.S. Treasury. Payment for
the gold certificates by the Reserve Banks is made by
crediting equivalent amounts in dollars into the
account established for the U.S. Treasury. These gold
certificates held by the Reserve Banks are required to
be backed by the gold of the U.S. Treasury. The U.S.
Treasury may reacquire the gold certificates at any
time, and the Reserve Banks must deliver them to the
By 1998 the intervention in the gold market was
progressing to such an extent that it is not
unreasonable to conclude that the Federal Reserve had
become concerned about the eventual ramifications of
these interventions and the Fed's involvement in it.
This view acquires extra weight when considering that
it was in 1998 when Fed Chairman Alan Greenspan
testified before Congress that quot;central banks stand
ready to leasequot; -- that is, lend -- gold in increasing
quantities should the price rise.quot;
Was the Fed trying to build some safety net around
itself so that it could reasonably blame the Treasury
for all the gold market intervention in some future
congressional investigation? This conclusion is not
unreasonable given the following change to the CFS.
5) In 1999 Footnote 2 on the CFS said: quot;Gold was
pledged as collateral for gold certificates issued to
the Federal Reserve Banks totaling $11.0 billion.quot;
Beginning in 2000, this disclosure was changed to read:
quot;Gold totaling $11 billion was pledged as collateral
for gold certificates issued and authorized to the
Federal Reserve Banks by the Secretary of the Treasury.
Treasury may redeem the gold certificates at any time.quot;
Why was the first sentence changed and the new
statement added? Was the GAO asking Treasury some tough
questions about Treasury's authority to deal in gold
and intervene in the gold market? Did Treasury feel
that because of its growing involvement in the gold
market some statement on its authority was necessary
for the sake of open and honest disclosure?
In this regard, I would like to confirm a point about
the U.S. government's authority to dispose of the U.S.
Gold Reserve. I had thought that congressional approval
was required, but I was wrong. Dave Walker set me
straight on that one.
Dave's name may be familiar to you. I've mentioned him
before in these letters. Dave is another diligent
researcher who has done some wonderful work for GATA.
Here's how Dave set me right on this matter: He went
straight to the law.
Though it had been my understanding that congressional
approval is required to sell gold, I've never
researched this point. I believe I probably first read
it in the media years ago and then just accepted as
fact that Congress must approve any transactions
involving the U.S. gold reserve. I was wrong, and Dave
proved it to me by showing me the U.S. Code. I had to
read the code myself to believe what he was telling me,
so flabbergasted was I that congressional approval was
NOT required. But there it was in Title 31, Section
The law doesn't say anything about any congressional
authority. I really find this hard to believe that the
president and treasury secretary can dispose of the
U.S. gold reserve without congressional approval, but
I've seen so much now I keep asking myself why I should
be surprised by yet another revelation. Same goes for
Title 12, Section 354, regarding the Federal Reserve
and its authority quot;to contract for loans of gold.quot;
Then Andrew Hepburn found the following in the
Treasury's Budget for FY 2002: quot;The Secretary of the
Treasury is authorized to deal in gold and foreign
exchange and other instruments of credit and securities
as deemed necessary, consistent with U.S. obligations
in the International Monetary Fund (IMF) regarding
orderly exchange arrangements and a stable system of
exchange rates. An Exchange Stabilization Fund, with a
capital of $200 million, is authorized by law for this
purpose.quot; (31 U.S.C. 5302.)
Thus, regardless what you may have thought, Congress
does not need to approve any U.S. gold sale, nor
anything else concerning the U.S. gold reserve,
including the quot;gold swapsquot; that we know were made
because their appearance in the minutes of the Federal
Open Market Committee's January 1995 meeting was
inadvertently not redacted. Given what we have already
seen, it is not too surprising that the footnotes to
the CFS and the annual report of the Federal Reserve
have been beefing up their disclosure about Treasury
authority as Treasury/ESF activity in the gold market
increases. And in this regard, I came across the
following very important change.
6) To define International Monetary Assets (IMA), the
1999 CFS states in Footnote 2: quot;Assets valued on a
basis other than the U.S. dollar comprise
'international monetary assets.'quot; This footnote then
goes on to list and explain each of those assets -- 1)
the U.S. reserve position in the International Monetary
Fund (IMF), 2) Special Drawing Rights (SDRs), 3)
foreign currency, and 4) other monetary assets
denominated in foreign currency. There is no mention of
gold, nor should there be, because gold is reported
separately in the table accompanying Footnote 2. But
compare this definition of IMA to the one used in the
Footnote 2 states: quot;'International monetary assets'
include the U.S. reserve position in the International
Monetary Fund (IMF), U.S. holdings of Special Drawing
Rights (SDRs), official reserves of foreign currency,
and gold.quot; And quot;goldquot;? Why is gold now being included
in this definition?
On the surface, including gold in this definition does
not make sense because it is reported separately in
Footnote 2 as $11 billion in both 1999 and 2000. But if
your intent is to hide a GOLD LIABILITY, then
everything falls into place. The above assets are being
reported NET of offsetting liabilities.
As proof that the international monetary assets are
reported above on a net basis -- that is, net of
liabilities -- consider the following evidence.
The 2000 CFS reports the international monetary asssets
as $35.2 billion and states: quot;The U.S. reserve position
in the IMF has a U.S. dollar equivalent of $13.7
billion as of that date.quot; It goes on to say: quot;SDR
holdings are an asset of Treasury's Exchange
Stabilization Fund (ESF), which held SDRs totaling
$10.3 billion equivalent at the end of fiscal 2000.quot;
The CFS does not state the foreign currency holdings,
but we can calculate what they are by subtracting the
$13.7 billion IMF position and $10.3 billion SDR
position from total international monetary assets of
$35.2 billion, which equals foreign currency holdings
of $11.2 billion. Then compare this total from the 2000
CFS to the U.S. Reserve Assets reported in the December
2000 Treasury Bulletin. This comparison is presented
International Monetary Assets as of Sept. 30 2000
Treasury Report Total Gold SDRs Foreign Position
stock Currency in IMF
Dec. 2000 bulletin 66,256 11,046 10,316 31,209 13,685
($ in millions)
2000 CFS 46.2 11.0 10.3 11.2 13.7
($ in billions)
We can see from the above table that the gold stock,
SDRs, and Position in the IMF are the same for both
reports, allowing only for the different levels of
precision by which they are reported. But note that the
foreign currency assets are $31.2 billion according to
the report of US Reserve Assets in the Treasury
Bulletin, but only $11.2 billion on the CFS.
The reason for this difference is clear.
The U.S. Reserve Assets are reported in the Treasury
Bulletin on a gross basis. But the CFS is prepared
using GAAP, and therefore these assets must be reported
net of any offsetting liabilities. (For example, just
as account receivables are reported in GAAP on a net
So the comparison of these two reports on a gross and
net basis shows that the U.S. government has a $20
billion LIABIITY, but not just for foreign currency.
There is a liability for gold as well because Footnote
2 says so. As noted above, it defined international
monetary assets to quot;include the U.S. reserve position
in the International Monetary Fund (IMF), U.S. holdings
of Special Drawing Rights (SDRs), official reserves of
foreign currency, AND gold.quot; (Emphasis added.) The word
quot;goldquot; was added there in 2000 for a reason, and that
reason is to record the U.S. government's gold
liability -- it owes gold. But to whom?
Last April in my essay quot;Behind Closed Doors,quot; I
presented evidence that the U.S. government had swapped
with the Bundesbank some 1,700 tonnes of gold stored at
the depository in West Point. At the time, I wasn't
able to figure out where the transaction was hidden in
the U.S. governments accounts, but I now have the
answer. This 1,700 tonnes at $280 per ounce is a $15.3
billion transaction. This accounting entry is in the
$20 billion liability explained above, which at $280
per ounce allows for the possibility that the gold swap
has increased to $20 billion. I say quot;possiblequot; because
the rest of this liability may have arisen from a
So here's the accounting. The U.S. government swaps
gold with the Bundesbank, which now owns the gold at
West Point. quot;Further, to secure this transaction, the
Bundesbank receives SDR Certificates, which solves quot;The
Mystery of the Disappearing SDR Certificatesquot;
(Freemarket Gold and Money Report Letter No. 289,
August 13, 2001). The ESF gets the gold in the
Bundesbank's vault, which it then lends to the bullion
banks in an off-balance sheet transaction.
Since I first reported that the Bundesbank owns the
gold in the Treasury vault at West Point, I have been
asked countless timesquot; How can the gold still be
reported as being held in the Treasury vaults and
listed as a U.S. Reserve Asset if it is really owned by
the Bundesbank? Well, according to GAAP accounting, it
can't. And that is what I have now discovered in the
2000 CFS, which presents the offsetting gold liability
in the International Monetary Assets.
This 2000 CFS footnote was changed from the 1999 CFS
for a reason -- to reflect new conditions in the
accounts. As further confirmation of this point, we
already know that on September 30, 2000, in its reports
of the US Gold Reserve, the Treasury began labeling the
gold in West Point as quot;Custodial Gold,quot; changing it
from its previous classification of quot;Bullion Reserve.quot;
This gold is being held in custody for the Bundesbank,
It is worth recalling that all these changes took place
in the fiscal year ending September 30, 2000. That year
began October 1, 1999, just days after the Washington
Agreement. There has been a lot of evidence presented
that the Bank of England and other central banks
intervened heavily in the gold market to cap the rally
then under way to get the gold price back below $300
per ounce. (See, for example, Paragraph 55 of Reg
Howe's Complaint against the Bank for International
Settlements et al. at www.goldensextant.com.)
Finally, there is one last point to consider. Why
didn't the General Accounting Office require this gold
liability to be offset directly against the U.S. Gold
Reserve, instead of the foreign currency holdings?
Clearly, that accounting would have laid bare for all
to see that the West Point gold has been swapped, so
that is one reason why the Treasury/ESF didn't report
it that way. But I actually think GAAP standards are
being met by the way the accounting was handled.
First, possession is nine tenths of the law. The gold
is still in Treasury vaults, so what is the Bundesbank
going to do to get its gold back if the Treasury
refuses to release it? Send over the German army?
Besides, the Bundesbank got the SDR Certificates as
security, so one could reasonably argue that the
Bundesbank could be made whole by replacing on its
balance sheet the gold it formerly owned with the SDR
Certificates it now owns. (Of course, I would have
never accepted paper as equivalent value in exchange
for gold, but then, I'm not a central banker.)
In summary, there is still some room for more
interpretations about the precise accounting, but I
think we have taken one more giant step forward by
providing this evidence to account for the gold swap.
We have explained how the ESF has been surreptitiously
intervening in the gold market. We know where they get
the metal that they need. We now also know how they
account for it. And we know their motive -- to maintain
the illusion that the dollar is worthy of being the
world's quot;reserve currency.quot; And all of this ESF gold-
related activity has been occurring without
congressional approval, which as noted, is not needed.
Over the past few years I have presented in these
letters strong evidence that the gold price is
abnormally low because of government manipulation. The
evidence is compelling, but not everyone has yet been
convinced. Two reasons most often emerge to explain the
Skeptics note the absence of any congressional approval
for putting the U.S. Gold Reserve into play. We now
know that Congress has no control over the gold
reserve, and its approval is not needed.
The other reason for skepticism relates to reporting.
How can the U.S. government report the ownership of
gold assets in West Point that are really owned by the
Bundesbank? The answer is simple -- only if the U.S.
government owes the gold to someone else. The CFS
reports the offsetting gold liability, so the U.S.
government holds the gold asset in custody for its real
owner, the Bundesbank, which explains why the West
Point reserve was changed to quot;custodial goldquot; -- the
U.S. government doesn't own it.
I hope that this report will convince the remaining
skeptics and spur Congress to investigate what is
happening to America's gold.
This report shines more light on the ESF and the gold
shorts. The circle is tightening around them. The
pressure is building. One of these days, they will lose
control, sending the gold price soaring. And I think
that moment is getting very close.